UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
x ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 2015
OR
Ź TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From
to
Commission
File Number 0-14278
MICROSOFT
CORPORATION
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WASHINGTON |
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91-1144442 |
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(STATE
OF INCORPORATION) |
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(I.R.S.
ID) |
ONE
MICROSOFT WAY, REDMOND, WASHINGTON 98052-6399
(425)
882-8080
www.microsoft.com/investor
Securities
registered pursuant to Section 12(b) of the Act:
COMMON STOCK, $0.00000625 par value per
share
NASDAQ
Securities
registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark if the registrant is a
well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes x No
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Indicate by check mark if the registrant is not
required to file reports pursuant to Section 13 or Section 15(d) of
the Exchange Act. Yes Ź No
x
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90
days. Yes x No Ź
Indicate by check mark whether
the registrant has submitted electronically and posted on its corporate
website, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (¤232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). Yes x No
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Indicate by check mark if disclosure of delinquent
filers pursuant to Item 405 of Regulation S-K (¤229.405 of this chapter)
is not contained herein, and will not be contained, to the best of registrantŐs
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form
10-K. Ź
Indicate by check mark whether the registrant is a
large accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company. See the definitions of Ňlarge accelerated filer,Ó
Ňaccelerated filerÓ and Ňsmaller reporting companyÓ in
Rule 12b-2 of the Exchange Act.
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Large accelerated filer |
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Accelerated filer |
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Non-accelerated filer |
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not check if a smaller reporting company) |
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Smaller reporting company |
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Indicate by check mark whether
the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes Ź No x
As of December 31,
2014, the aggregate market value of the registrantŐs common stock held by
non-affiliates of the registrant was $365,312,377,595 based on the closing sale
price as reported on the NASDAQ National Market System. As of July 27, 2015,
there were 7,997,980,969 shares of common stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered
to shareholders in connection with the Annual Meeting of Shareholders to be
held on December 2, 2015 are incorporated by reference into Part III.
MICROSOFT CORPORATION
FORM 10-K
For The Fiscal Year Ended June 30, 2015
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PART I |
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Item 1. |
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Business |
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3 |
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Executive
Officers of the Registrant |
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15 |
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Item 1A. |
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Risk Factors |
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Item 1B. |
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Unresolved Staff
Comments |
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Item 2. |
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Properties |
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Item 3. |
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Legal
Proceedings |
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Item 4. |
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Mine Safety
Disclosures |
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PART II |
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Item 5. |
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Market for
RegistrantŐs Common Equity, Related Stockholder Matters, and Issuer Purchases
of Equity Securities |
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25 |
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Item 6. |
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Selected
Financial Data |
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Item 7. |
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ManagementŐs
Discussion and Analysis of Financial Condition and Results of Operations |
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Item 7A. |
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Quantitative and
Qualitative Disclosures about Market Risk |
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Item 8. |
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Financial
Statements and Supplementary Data |
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Item 9. |
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Changes in and
Disagreements with Accountants on Accounting and Financial Disclosure |
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Item 9A. |
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Controls and
Procedures |
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Report of
Management on Internal Control over Financial Reporting |
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Report of
Independent Registered Public Accounting Firm |
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Item 9B. |
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Other Information |
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PART III |
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Item 10. |
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Directors,
Executive Officers and Corporate Governance |
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Item 11. |
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Executive
Compensation |
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Item 12. |
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Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters |
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Item 13. |
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Certain
Relationships and Related Transactions, and Director Independence |
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Item 14. |
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Principal
Accounting Fees and Services |
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PART IV |
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Item 15. |
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Exhibits,
Financial Statement Schedules |
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Signatures |
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Note About Forward-Looking Statements
This
report includes estimates, projections, statements relating to our business
plans, objectives, and expected operating results that are Ňforward-looking
statementsÓ within the meaning of the Private Securities Litigation Reform Act
of 1995, Section 27A of the Securities Act of 1933 and Section 21E of
the Securities Exchange Act of 1934. Forward-looking statements may appear
throughout this report, including the following sections: ŇBusiness,Ó
ŇManagementŐs Discussion and Analysis,Ó and ŇRisk Factors.Ó These
forward-looking statements generally are identified by the words Ňbelieve,Ó
Ňproject,Ó Ňexpect,Ó Ňanticipate,Ó Ňestimate,Ó Ňintend,Ó Ňstrategy,Ó Ňfuture,Ó
Ňopportunity,Ó Ňplan,Ó Ňmay,Ó Ňshould,Ó Ňwill,Ó Ňwould,Ó Ňwill be,Ó Ňwill
continue,Ó Ňwill likely result,Ó and similar expressions. Forward-looking
statements are based on current expectations and assumptions that are subject
to risks and uncertainties that may cause actual results to differ materially.
We describe risks and uncertainties that could cause actual results and events
to differ materially in ŇRisk FactorsÓ (Part I, Item 1A of this Form
10-K), ŇQuantitative and Qualitative Disclosures about Market RiskÓ (Part II,
Item 7A), and ŇManagementŐs Discussion and AnalysisÓ (Part II, Item 7).
We undertake no obligation to update or revise publicly any forward-looking
statements, whether because of new information, future events, or otherwise.
PART I
ITEM 1. BUSINESS
GENERAL
Our
vision
Microsoft is a technology company whose
mission is to empower every person and every organization on the planet to
achieve more. Our strategy is to build best-in-class platforms and productivity
services for a mobile-first, cloud-first world.
The mobile-first, cloud-first
world is transforming the way individuals and organizations use and interact
with technology. Our worldview for mobile-first is not about the mobility of
devices; it is centered on the mobility of experiences that, in turn, are
orchestrated by the cloud. Cloud computing and storage solutions provide users
and enterprises with various capabilities to store and process their data in
third-party data centers. Mobility encompasses the rich collection of data,
applications, and services that accompany our customers as they move from
setting to setting in their lives. We are transforming our businesses to enable
Microsoft to lead the direction of this transformation, and enable our
customers and partners to thrive in this evolving world.
What
we offer
Founded in 1975, we operate worldwide and have offices in more than 100 countries. We develop, license, and support a wide range of software products, services, and devices that deliver new opportunities, greater convenience, and enhanced value to peopleŐs lives. We offer an array of services, including cloud-based services, to consumers and businesses. We design, manufacture, and sell devices that integrate with our cloud-based services, and we deliver relevant online advertising to a global audience.
Our products include operating systems for computing devices, servers, phones, and other intelligent devices; server applications for distributed computing environments; cross-device productivity applications; business solution applications; desktop and server management tools; software development tools; video games; and online advertising. We also design and sell hardware including PCs, tablets, gaming and entertainment consoles, phones, other intelligent devices, and related accessories. We offer cloud-based solutions that provide customers with software, services, platforms, and content. We also provide consulting and product and solution support services, and we train and certify computer system integrators and developers.
The ambitions that drive us
To carry out our strategy, our
research and development efforts focus on three interconnected ambitions:
Ľ Reinvent productivity and
business processes.
Ľ Build the intelligent cloud
platform.
Ľ Create more personal computing.
Reinvent productivity and business processes
We believe we can significantly enhance the
lives of our customers using our broad portfolio of communication,
productivity, and information services that spans devices and platforms.
Productivity will be the first and foremost objective, to enable people to meet
and collaborate more easily, and to effectively express ideas in new ways. We
will design applications as dual-use with the intelligence to partition data
between work and life while respecting each personŐs privacy choices. The
foundation for these efforts will rest on advancing our leading productivity,
collaboration, and business process tools including Skype, OneDrive, OneNote,
Outlook, Word, Excel, PowerPoint, Bing, and Dynamics. With Office 365,
we provide these familiar industry-leading productivity and business process
tools as cloud services, enabling access from anywhere and any
device. This creates an opportunity to reach new customers, and expand the
usage of our services by our existing customers. We see opportunity in combining our offerings in new ways that are more contextual
and personal, while ensuring people, rather than their devices, remain at the
center of the digital experience. We will offer our services across ecosystems
and devices outside our own. As people move from device to device, so will
their content and the richness of their services. We are engineering our
applications so users can find, try, and buy them in friction-free ways.
Build
the intelligent cloud platform
In deploying technology that advances
business strategy, enterprises decide what solutions will make employees more
productive, collaborative, and satisfied, and connect with customers in new and
compelling ways. They work to unlock business insights from a world of data. To
achieve these objectives, increasingly businesses look to leverage the benefits
of the cloud. Helping businesses move to the cloud is one of our largest
opportunities, and we believe we work from a position of strength.
The shift to the cloud is driven by three
important economies of scale: larger datacenters can deploy computational
resources at significantly lower cost per unit than smaller ones; larger
datacenters can coordinate and aggregate diverse customer, geographic, and
application demand patterns, improving the utilization of computing, storage,
and network resources; and multi-tenancy lowers application maintenance labor
costs for large public clouds. As one of the largest providers of cloud
computing at scale, we are well-positioned to help businesses move to the cloud
so that businesses can focus on innovation while leaving non-differentiating
activities to reliable and cost-effective providers like Microsoft.
With Azure, we are one of very few cloud
vendors that run at a scale that meets the needs of businesses of all sizes and
complexities. We believe the combination of Azure and Windows Server makes us
the only company with a public, private, and hybrid cloud platform that can
power modern business. We are working to enhance the return on information
technology (ŇITÓ) investment by enabling enterprises to combine their existing
datacenters and our public cloud into a single cohesive infrastructure.
Businesses can deploy applications in their own datacenter, a partnerŐs
datacenter, or in our datacenters with common security, management, and
administration across all environments, with the flexibility and scale they want.
We enable organizations to securely adopt
software-as-a-service applications (both our own and third-party) and integrate
them with their existing security and management infrastructure. We will
continue to innovate with higher-level services including identity and
directory services that manage employee corporate identity and manage and
secure corporate information accessed and stored across a growing number of
devices, rich data storage and analytics services, machine learning services,
media services, web and mobile backend services, and developer productivity
services. To foster a rich developer ecosystem, our digital work and life
experiences will also be extensible, enabling customers and partners to further
customize and enhance our solutions, achieving even more value. This strategy
requires continuing investment in datacenters and other infrastructure to
support our devices and services.
Create more personal
computing
Windows 10 is the cornerstone of our
ambition to usher in an era of more personal computing. We see the launch of
Windows 10 in July 2015 as a critical, transformative moment for the Company
because we will move from an operating system that runs on a PC to a service
that can power the full spectrum of devices in our customersŐ lives. We
developed Windows 10 not only to be familiar to our users, but more safe and secure,
and always up-to-date. We believe Windows 10 is more personal and productive,
working seamlessly with functionality such as Cortana, Office, Continuum, and universal
applications. We designed Windows 10 to foster innovation Đ from us, our
partners and developers Đ through experiences such as our new browser Microsoft
Edge, across the range of existing devices, and into entirely new device
categories.
Our ambition for Windows 10 is to broaden
our economic opportunity through three key levers: an original equipment
manufacturer (ŇOEMÓ) ecosystem that creates exciting new hardware designs for
Windows 10; our own commitment to the health and profitability of our
first-party premium device portfolio; and monetization opportunities such as
services, subscriptions, gaming, and search. Our OEM partners are investing in
an extensive portfolio of hardware designs and configurations as they ready for
Windows 10. By December 2015, we anticipate the widest range of Windows
hardware ever to be available.
With the launch of Windows 10, we are
realizing our vision of a single, unified Windows operating system on which developers
and OEMs can contribute to a thriving Windows ecosystem. We invest heavily to
make Windows the most secure, manageable, and capable operating system for the
needs of a modern workforce. We are working to create a broad developer
opportunity by unifying the installed base to Windows 10 through upgrades and
ongoing updates, and by enabling universal Windows applications to run across
all device targets. As part of our strategic objectives, we are committed to designing
and marketing first-party devices to help drive innovation, create new
categories, and stimulate demand in the Windows ecosystem, including across
PCs, phones, tablets, consoles, wearables, large multi-touch displays, and new
categories such as the HoloLens holographic computing platform. We are
developing new input/output methods like speech, pen, gesture, and augmented
reality holograms to power more personal computing experiences with Windows 10.
Our future opportunity
There are several distinct areas of technology that we aim to drive forward. Our goal is to lead the industry in these areas over the long-term, which we expect will translate to sustained growth. We are investing significant resources in:
Ľ Delivering
new productivity, entertainment, and business processes to improve how people communicate,
collaborate, learn, work, play, and interact with one another.
Ľ Establishing the Windows platform across the PC, tablet, phone, server, other devices, and the cloud to drive a thriving ecosystem of developers, unify the cross-device user experience, and increase agility when bringing new advances to market.
Ľ Building
and running cloud-based services in ways that unleash new experiences and
opportunities for businesses and individuals.
Ľ Developing
new devices that have increasingly natural ways to interact with them,
including speech, pen, gesture, and augmented reality holograms.
Ľ Applying machine learning to make technology more intuitive and able to act on our behalf, instead of at our command.
We
believe the breadth of our products and services portfolio, our large global
partner and customer base, our growing ecosystem, and our ongoing investment in
innovation position us to be a leader in these areas and differentiate
ourselves from competitors.
OPERATING SEGMENTS
We
operate our business in six segments. Our Devices and Consumer (ŇD&CÓ) segments
include D&C Licensing, Computing and Gaming Hardware, Phone Hardware, and D&C
Other. Our Commercial segments include Commercial Licensing and Commercial
Other. Our segments provide management with a comprehensive financial view of
our key businesses. The segments enable the alignment of strategies and
objectives across the development, sales, marketing, and services organizations,
and they provide a framework for timely and rational allocation of development,
sales, marketing, and services resources within businesses. In June 2015, we
announced a change in organizational structure as part of our transformation in
the mobile-first, cloud-first world. As we evolve how we allocate resources and
analyze performance in the new structure, it is possible that our segments may
change.
On
April 25, 2014, we acquired substantially all of Nokia CorporationŐs
(ŇNokiaÓ) Devices and Services Business (ŇNDSÓ). We report the financial
performance of the acquired business in our Phone Hardware segment. Prior to
the acquisition of NDS, financial results associated with our joint strategic
initiatives with Nokia were reflected in our D&C Licensing segment. The
contractual relationship with Nokia related to those initiatives ended in
conjunction with the acquisition.
Additional information on our operating segments
and geographic and product information is contained in Note 22 Đ Segment
Information and Geographic Data of the Notes to Financial Statements (Part II,
Item 8 of this Form 10-K).
Devices and Consumer
Our
D&C segments develop, manufacture, market, and support products and
services designed to entertain and connect people, increase personal
productivity, help people simplify tasks and make more informed decisions
online, and help advertisers connect with audiences. Our D&C segments are
made up of D&C Licensing, Computing and Gaming Hardware, Phone Hardware,
and D&C Other.
D&C Licensing
The
principal products and services provided by the D&C Licensing segment are:
Windows, including all OEM licensing (ŇWindows OEMÓ) and other non-volume
licensing and academic volume licensing of the Windows operating system and
related software; non-volume licensing of Microsoft Office, comprising the core
Office product set, for consumers (ŇOffice ConsumerÓ); Windows Phone operating
system, including related patent licensing; and certain other patent licensing
revenue.
The Windows operating system is designed to
deliver a more personal computing experience for users by enabling consistency
of experience, applications, and information across their devices.
Windows revenue is impacted significantly by the
number of Windows operating system licenses purchased by OEMs, which they
pre-install on the devices they sell. In addition to computing device market
volume, Windows revenue is impacted by:
Ľ The
mix of computing devices based on form factor and screen size.
Ľ Differences
in device market demand between developed markets and emerging markets.
Ľ Attachment
of Windows to devices shipped.
Ľ Customer
mix between consumer, small- and medium-sized businesses, and large enterprises.
Ľ Changes
in inventory levels in the OEM channel.
Ľ Pricing
changes and promotions, pricing variation that occurs when the mix of devices
manufactured shifts from local and regional system builders to large,
multinational OEMs, and different pricing of Windows versions licensed.
Ľ Piracy.
The versions of Office included in our D&C
Licensing segment are designed to increase personal productivity through a
range of programs, services, and software solutions. Growth depends on our
ability to add value to the core product set and to continue to expand our
product offerings in other areas such as content management and collaboration.
Office Consumer revenue is impacted by sales to customers that buy Office with
their new devices and by product launches, as well as the transition to Office
365 Consumer, our subscription-based cloud service that provides access to
Office plus other productivity services. Office 365 Consumer revenue is
included in our D&C Other segment.
The
Windows Phone operating system is designed to bring users closer to the people,
applications, and content they need. As noted above, prior to our acquisition
of NDS, Microsoft and Nokia jointly created new mobile products and services
and extended established products and services to new markets through a
strategic alliance. Windows Phone revenue associated with this contractual
relationship was reflected in D&C Licensing. Windows Phone revenue also
includes revenue from licensing mobile-related patents.
Competition
The Windows
operating system faces competition from various software products and from
alternative platforms and devices, mainly from Apple and Google. We believe
Windows competes effectively by giving customers choice, value, flexibility,
security, an easy-to-use interface, compatibility with a broad range of
hardware and software applications, including those that enable productivity,
and the largest support network for any operating system.
Competitors
to the versions of Office included in D&C Licensing include global
application vendors such as Apple and Google, numerous web-based and mobile
application competitors, and local application developers in Asia and Europe.
Apple distributes versions of its pre-installed application software, such as
email, note-taking, and calendar products, through its PCs, tablets, and
phones. Google provides a hosted messaging and productivity suite. Web-based
offerings competing with individual applications can also position themselves
as alternatives to our products. We believe our products compete effectively
based on our strategy of providing powerful, flexible, secure, and easy to use
solutions that work across a variety of devices.
Windows
Phone operating system faces competition from iOS, Android, and Blackberry operating
systems. Windows Phone competes based on differentiated user interface,
personalized applications, compatibility with Windows PCs and tablets, and
other unique capabilities.
Computing and
Gaming Hardware
The
principal products and services provided by the Computing and Gaming Hardware
segment are: Xbox gaming and entertainment consoles and accessories,
second-party and third-party video game royalties, and Xbox Live subscriptions
(ŇXbox PlatformÓ); Surface devices and accessories (ŇSurfaceÓ); and Microsoft
PC accessories.
The
Xbox Platform is designed to provide a unique variety of entertainment choices
through the use of our devices, peripherals, content, and online services. We
released Xbox 360 and Xbox One in November 2005 and November 2013, respectively.
Surface
is designed to help organizations, students, and consumers to be more
productive. Our latest Surface devices, the Surface Pro 3 and Surface 3, were
released in June 2014 and May 2015, respectively.
Competition
Our
Xbox Platform competes with console platforms from Sony and Nintendo, both of
which have a large, established base of customers. The lifecycle for gaming and
entertainment consoles averages five to ten years. Nintendo released their
latest generation console in November 2012. Sony released their latest
generation console in November 2013.
We believe the success of gaming and entertainment
consoles is determined by the availability of games for the console, providing
exclusive game content that gamers seek, the computational power and
reliability of the console, and the ability to create new experiences via
online services, downloadable content, and peripherals. In addition to Sony and
Nintendo, we compete with other providers of entertainment services through
online marketplaces. We believe the Xbox Platform is effectively
positioned against competitive products and services based on significant
innovation in hardware architecture, user interface, developer tools, online
gaming and entertainment services, and continued strong exclusive content from
our own game franchises as well as other digital content offerings.
Surface
devices face competition from Apple, as well as other computer, tablet, and
hardware manufacturers, many of which are also current or potential partners
and customers.
Phone Hardware
The
principal products provided by the Phone Hardware segment are Lumia phones and
other non-Lumia phones, which we began manufacturing and selling with the
acquisition of NDS on April 25, 2014. Our Lumia phones run Windows and are designed to enable
people and organizations to connect to the people and content that matter most,
using integrated Microsoft services such as Outlook, OneDrive, Skype, and
Office.
Competition
Our
phones face competition primarily from Apple, Samsung, and many other mobile
device manufacturers running the Android operating system, and offer a unique combination
of high-quality industrial design and innovative imaging technologies across
various price points.
D&C Other
The
principal products and services provided by the D&C Other segment are:
Resale, consisting of transactions in our Windows Store and Xbox marketplace;
search advertising; display advertising; Office 365 Consumer, comprising Office
365 Home and Office 365 Personal; Studios, comprising first-party video games; Mojang;
and non-Microsoft products sold in our retail stores.
Our
online application marketplaces are designed to benefit our developer and
partner ecosystems by providing access to a large customer base and benefit
users by providing centralized access to certified applications. Xbox Live
transactions consist of online entertainment content, such as games, music,
movies, and TV shows, accessible on Xbox consoles and other devices.
Search
and display advertising includes Bing, Bing Ads, MSN, and Xbox ads. We have a
partnership with Yahoo! in which we provide algorithmic and paid search
platform for Yahoo! websites worldwide. In June 2015, we entered into
agreements with AOL and AppNexus to outsource our display sales efforts.
Office
365 Consumer is designed to increase personal productivity through a range of
Microsoft Office programs and services delivered across multiple platforms via
the cloud.
Studios
designs and markets games for Xbox consoles, Windows-enabled devices, and
online. Growth depends on our ability to attract new users and increase
engagement by developing a deep library of content that consumers seek.
We
acquired Mojang Synergies AB (ŇMojangÓ), the Swedish video game developer of the
Minecraft gaming franchise, in November 2014. The addition of Minecraft and its
community enhances our gaming portfolio across Windows, Xbox, and other
ecosystems besides our own.
Competition
We
face competition for our Resale products and services from various online
marketplaces, including those operated by Amazon, Apple, and Google.
Our search and display advertising business
competes with Google and a wide array of websites, social platforms like
Facebook, and portals like Yahoo! that provide content and online offerings to
end users. Our success depends on our ability to attract new users, understand
intent, and match intent with relevant content and advertiser offerings. We
believe we can attract new users by continuing to offer new and compelling
products and services.
Competitors
to Office 365 Consumer are the same as those discussed above for Office
Consumer.
Competitors
to Studios and Mojang are the same as those discussed above for our Xbox gaming
and entertainment business, as well as game studios like Electronic Arts and
Activision Blizzard.
Commercial
Our
Commercial segments develop, market, and support software and services designed
to increase individual, team, and organizational productivity and efficiency, including
simplifying everyday tasks through seamless operations across the userŐs
hardware and software. Commercial is made up of the Commercial Licensing and
Commercial Other segments.
Commercial Licensing
The
principal products and services provided by the Commercial Licensing segment
are: server products, including Windows Server, Microsoft SQL Server, Visual
Studio, System Center, and related Client Access Licenses (ŇCALsÓ); Microsoft
Office for business, including Office, Exchange, SharePoint, Skype for
Business, and related CALs (ŇOffice CommercialÓ); volume licensing of the
Windows operating system, excluding academic (ŇWindows CommercialÓ); Microsoft
Dynamics business solutions, excluding Dynamics CRM Online; Windows Embedded; and
Skype.
Our
server products are designed to make information technology professionals and
developers and their systems more productive and efficient. Server software is
integrated server infrastructure and middleware designed to support software
applications built on the Windows Server operating system. This includes the
server platform, database, business intelligence, storage, management and
operations, virtualization, service-oriented architecture platform, security,
and identity software. We also license standalone and software development
lifecycle tools for software architects, developers, testers, and project
managers. Revenue comes from purchases through volume licensing programs,
licenses sold to OEMs, and retail packaged product. CALs provide access rights
to certain server products, including Windows Server and SQL Server. CAL
revenue is reported along with the associated server product.
The
versions of Office in Commercial Licensing are designed to increase personal,
team, and organizational productivity through a range of programs, services,
and software solutions. Office Commercial revenue is mainly affected by a
combination of the demand from commercial customers for volume licensing and
software assurance and the number of information workers in a licensed
enterprise. Office Commercial revenue growth depends on our ability to add
value to the core product set and to continue to expand our product offerings
in other areas such as content management, enterprise search, collaboration,
unified communications, and business intelligence. CALs provide access rights
to certain Office Commercial products, including Exchange, SharePoint, and
Skype for Business, formerly Lync. CAL revenue is reported along with the
associated Office product.
Windows
Commercial includes volume licensing of the Windows operating system, excluding
academic. Windows Commercial revenue is affected mainly by the demand from
commercial customers for volume licensing and software assurance, often
reflecting the number of information workers in a licensed enterprise, and is
therefore relatively independent of the number of PCs sold in a given year.
Microsoft
Dynamics products provide business solutions for financial management, customer
relationship management, supply chain management, and analytics applications
for small and mid-size businesses, large organizations, and divisions of global
enterprises. Revenue is largely driven by the number of information workers
licensed.
Windows
Embedded extends the power of Windows and the cloud to intelligent systems,
including the Internet of Things (ŇIoTÓ), by delivering specialized operating
systems, tools, and services.
Skype
is designed to connect friends, family, clients, and colleagues through a
variety of devices. Revenue is largely driven by the sale of minutes,
subscriptions, and advertising.
Competition
Our
server products face competition from a wide variety of server operating
systems and applications offered by companies with a range of market
approaches. Vertically integrated computer manufacturers such as
Hewlett-Packard, IBM, and Oracle offer their own versions of the Unix operating
system preinstalled on server hardware. Nearly all computer manufacturers offer
server hardware for the Linux operating system and many contribute to Linux
operating system development. The competitive position of Linux has also
benefited from the large number of compatible applications now produced by many
commercial and non-commercial software developers. A number of companies, such
as Red Hat, supply versions of Linux.
We
compete to provide enterprise-wide computing solutions and point solutions with
numerous commercial software vendors that offer solutions and middleware
technology platforms, software applications for connectivity (both Internet and
intranet), security, hosting, database, and e-business servers. IBM and Oracle
lead a group of companies focused on the Java Platform Enterprise Edition that
competes with our enterprise-wide computing solutions. Commercial competitors
for our server applications for PC-based distributed client/server environments
include CA Technologies, IBM, and Oracle. Our web application platform software
competes with open source software such as Apache, Linux, MySQL, and PHP. In
middleware, we compete against Java middleware vendors.
Our
system management solutions compete with server management and server
virtualization platform providers, such as BMC, CA Technologies,
Hewlett-Packard, IBM, and VMware. Our database, business intelligence, and data
warehousing solutions offerings compete with products from IBM, Oracle, SAP,
and other companies. Our products for software developers compete against
offerings from Adobe, IBM, Oracle, other companies, and open-source projects,
including Eclipse (sponsored by CA Technologies, IBM, Oracle, and SAP), PHP,
and Ruby on Rails, among others.
We
believe our server products provide customers with advantages in performance,
total costs of ownership, and productivity by delivering superior applications,
development tools, compatibility with a broad base of hardware and software
applications, security, and manageability.
Competitors
to Office Commercial includes software application vendors such as Adobe
Systems, Apple, Cisco Systems, Google, IBM, Oracle, SAP, and numerous web-based
and mobile application competitors as well as local application developers in
Asia and Europe. Cisco Systems is using its position in enterprise
communications equipment to grow its unified communications business. Google
provides a hosted messaging and productivity suite. Web-based offerings
competing with individual applications have also positioned themselves as
alternatives to our products. We believe our products compete effectively based
on our strategy of providing powerful, flexible, secure, easy to use solutions
that work well with technologies our customers already have and are available
on a device or via the cloud.
Competitors
to Windows Commercial are the same as those discussed above for Windows in the
D&C Licensing segment.
Our
Microsoft Dynamics products compete with vendors such as Oracle and SAP in the
market for large organizations and divisions of global enterprises. In the
market focused on providing solutions for small and mid-sized businesses, our
Microsoft Dynamics products compete with vendors such as Infor, The Sage Group,
and NetSuite. Salesforce.comŐs cloud customer relationship management (ŇCRMÓ)
offerings compete directly with Microsoft Dynamics CRM on-premises offerings.
Skype
competes with a variety of instant messaging, voice, and video communication
providers, ranging from start-ups to established enterprises.
Commercial Other
The
principal products and services provided by the Commercial Other segment are:
Commercial Cloud, comprising Office 365 Commercial, Microsoft Azure, Dynamics
CRM Online, and other Microsoft Office online offerings; and Enterprise
Services, including Premier Support Services and Microsoft Consulting Services.
Office
365 Commercial is an online services offering that includes Microsoft Office,
Exchange, SharePoint, and Skype for Business, and is available across a variety
of devices and platforms.
Microsoft
Azure is a scalable cloud platform with computing, networking, storage,
database, and management, along with advanced services such as analytics, and comprehensive
solutions such as Enterprise Mobility Suite. Microsoft Azure also includes a flexible
platform that helps developers build, deploy, and manage enterprise, mobile,
web, and IoT applications, for any platform or device without having to worry
about the underlying infrastructure. Microsoft Azure enables customers to
devote more resources to development and use of applications that benefit their
organizations, rather than managing on-premises hardware and software.
Dynamics
CRM Online is designed to provide customer relationship management and
analytics applications for small and mid-size businesses, large organizations,
and divisions of global enterprises. Revenue is largely driven by the number of
information workers licensed.
Enterprise
Services, including Premier Support Services and Microsoft Consulting Services,
assist customers in developing, deploying, and managing Microsoft server and
desktop solutions and provide training and certification to developers and
information technology professionals on various Microsoft products.
Competition
Competitors
to Office 365 Commercial are the same as those discussed above for Office
Commercial.
Microsoft
Azure faces diverse competition from companies such as Amazon, Google, IBM,
Oracle, Salesforce.com, VMware, and open source offerings. Azure competes by
enabling deployment of existing data centers with our public cloud into a
single, cohesive infrastructure, and runs at a scale that meets the needs of
businesses of all sizes and complexities.
Dynamics
CRM Online primarily competes with Salesforce.comŐs on-demand CRM offerings.
The
Enterprise Services business competes with a wide range of companies that
provide strategy and business planning, application development, and
infrastructure services, including multinational consulting firms and small
niche businesses focused on specific technologies.
OPERATIONS
We
have operations centers that support all operations in their regions, including
customer contract and order processing, credit and collections, information
processing, and vendor management and logistics. The regional center in Ireland
supports the European, Middle Eastern, and African region; the center in
Singapore supports the Japan, India, Greater China, and Asia-Pacific region;
and the centers in Fargo, North Dakota, Fort Lauderdale, Florida, Puerto Rico,
Redmond, Washington, and Reno, Nevada support Latin America and North America.
In addition to the operations centers, we also operate data centers throughout
the Americas, Australia, Europe, and Asia.
To
serve the needs of customers around the world and to improve the quality and
usability of products in international markets, we localize many of our
products to reflect local languages and conventions. Localizing a product may
require modifying the user interface, altering dialog boxes, and translating
text.
We operate
manufacturing facilities for the production and customization of phones,
predominantly in Vietnam.
Our Xbox consoles, Surface, first-party
video games, Microsoft PC accessories, and other hardware are primarily
manufactured by third-party contract manufacturers. We generally have the
ability to use other manufacturers if a current vendor becomes unavailable or
unable to meet our requirements.
RESEARCH AND DEVELOPMENT
During
fiscal years 2015, 2014, and 2013, research and development expense was $12.0
billion, $11.4 billion, and $10.4 billion, respectively. These amounts
represented 13% of revenue in each of those years. We plan to continue to make
significant investments in a broad range of research and development efforts.
Product and Service Development, and
Intellectual Property
We
develop most of our products and services internally through three engineering
groups.
Ľ Applications and Services Engineering Group,
focuses on broad applications and services core technologies in productivity,
communication, education, search, and other information categories.
Ľ Cloud and Enterprise Engineering Group,
focuses on development of our cloud infrastructure, server, database, CRM,
enterprise resource planning, management, development tools, and other business
process applications and services for enterprises.
Ľ Windows and Devices Engineering Group, focuses on our Windows platform across
devices of all types, hardware development of our devices, including Xbox
consoles, Surface devices, Lumia phones, non-Lumia phones, Surface Hub, Microsoft
Band, and other hardware products and accessories, and associated online
marketplaces.
Internal
development allows us to maintain competitive advantages that come from product
differentiation and closer technical control over our products and services. It
also gives us the freedom to decide which modifications and enhancements are
most important and when they should be implemented. We strive to obtain
information as early as possible about changing usage patterns and hardware
advances that may affect software design. Before releasing new software
platforms, we provide application vendors with a range of resources and
guidelines for development, training, and testing. Generally, we also create
product documentation internally.
We
protect our intellectual property investments in a variety of ways. We work
actively in the U.S. and internationally to ensure the enforcement of
copyright, trademark, trade secret, and other protections that apply to our
software and hardware products, services, business plans, and branding. We are
a leader among technology companies in pursuing patents and currently have a
portfolio of over 57,000 U.S. and international patents issued and over 35,000
pending. While we employ much of our internally developed intellectual property
exclusively in Microsoft products and services, we also engage in outbound and
inbound licensing of specific patented technologies that are incorporated into
licenseesŐ or MicrosoftŐs products. From time to time, we enter into broader
cross-license agreements with other technology companies covering entire groups
of patents. We also purchase or license technology that we incorporate into our
products or services. At times, we make select intellectual property broadly
available at no or low cost to achieve a strategic objective, such as promoting
industry standards, advancing interoperability, or attracting and enabling our
external development community.
While
it may be necessary in the future to seek or renew licenses relating to various
aspects of our products and business methods, we believe, based upon past
experience and industry practice, such licenses generally could be obtained on
commercially reasonable terms. We believe our continuing research and product
development are not materially dependent on any single license or other
agreement with a third party relating to the development of our products.
Investing in the Future
MicrosoftŐs
success is based on our ability to create new and compelling products,
services, and experiences for our users, to initiate and embrace disruptive
technology trends, to enter new geographic and product markets, and to drive
broad adoption of our products and services. We invest in a range of emerging
technology trends and breakthroughs that we believe offer significant
opportunities to deliver value to our customers and growth for the company. Based
on our assessment of key technology trends and our broad focus on long-term
research and development, we maintain our long-term commitment to research and
development across a wide spectrum of technologies, tools, and platforms
spanning digital work and life experiences, cloud computing, and devices
operating systems and hardware.
While
our main research and development facilities are located in Redmond,
Washington, we also operate research and development facilities in other parts
of the U.S. and around the world, including Canada, China, Denmark, Finland,
France, Germany, India, Ireland, Israel, Japan, and the United Kingdom, among
others. This global approach helps us remain competitive in local markets and
enables us to continue to attract top talent from across the world. We
generally fund research at the corporate level to ensure that we are looking
beyond immediate product considerations to opportunities further in the future.
We also fund research and development activities at the business segment level.
Much of our business segment level research and development is coordinated with
other segments and leveraged across the company.
In
addition to our main research and development operations, we also operate
Microsoft Research. Microsoft Research is one of the worldŐs largest computer
science research organizations, and works in close collaboration with top
universities around the world to advance the state-of-the-art in computer
science, providing us a unique perspective on future technology trends and
contributing to our innovation.
DISTRIBUTION, SALES, AND MARKETING
We
market and distribute our products and services through the following channels:
OEMs; distributors and resellers; online; and Microsoft retail stores. Our
sales force performs a variety of functions, including working directly with
enterprises and public sector organizations worldwide to identify and meet
their software requirements; managing OEM relationships; and supporting
solution integrators, independent software vendors, and other partners who
engage directly with our customers to perform sales, consulting, and
fulfillment functions for our products.
OEMs
We
distribute software through OEMs that pre-install our software on new PCs,
tablets, servers, phones, and other intelligent devices that they sell. The
largest component of the OEM business is the Windows operating system
pre-installed on computing devices. OEMs also sell hardware pre-installed with
other Microsoft products, including server and embedded operating systems and applications
such as our Microsoft Office suite. In addition to these products, we also
market our services through OEMs and service bundles such as Windows with Bing
or Windows with Office 365 subscription.
There are two broad categories of OEMs. The largest
OEMs, many of which operate globally, are referred to as ŇDirect OEMs,Ó as our
relationship with them is managed through a direct agreement between Microsoft
and the OEM. We have distribution agreements covering one or more of our
products with virtually all of the multinational OEMs, including Acer, ASUSTeK,
Dell, Fujitsu, Hewlett-Packard, Lenovo, Samsung, Toshiba, and with many
regional and local OEMs. The second broad category of OEMs consists of
lower-volume PC manufacturers (also called Ňsystem buildersÓ), which source
their Microsoft software for pre-installation and local redistribution
primarily through the Microsoft distributor channel rather than through a
direct agreement or relationship with Microsoft.
Distributors and Resellers
Many
organizations that license our products and services through enterprise
agreements transact directly with us, with sales support from solution
integrators, independent software vendors, web agencies, and developers that
advise organizations on licensing our products and services (ŇEnterprise
Agreement Direct AdvisorsÓ, or ŇEDAsÓ). Organizations also license our products
and services indirectly, primarily through license solutions partners (ŇLSPsÓ),
distributors, value-added resellers (ŇVARsÓ), OEMs, system builder channels,
and retailers. Although each type of reselling partner reaches organizations of
all sizes, LSPs are primarily engaged with large organizations, distributors
resell primarily to VARs, and VARs typically reach small-sized and medium-sized
organizations. EDAs typically are also authorized as LSPs and operate as
resellers for our other licensing programs, such as the Select Plus and Open
licensing programs discussed under ŇLicensing OptionsÓ below. Some of our
distributors include Ingram Micro and Tech Data, and some of our largest
resellers include CDW, Dell, Insight Enterprises, and Software House
International.
Our
Microsoft Dynamics software offerings are also licensed to enterprises through
a global network of channel partners providing vertical solutions and
specialized services. We distribute our retail packaged products primarily
through independent non-exclusive distributors, authorized replicators,
resellers, and retail outlets. Individual consumers obtain these products
primarily through retail outlets, including Microsoft retail stores. We
distribute our hardware products, including Surface, Xbox, phones, and PC
accessories, through third-party retailers and Microsoft retail stores. Our
phones are also distributed through global wireless communications carriers. We
have a network of field sales representatives and field support personnel that
solicits orders from distributors and resellers, and provides product training
and sales support.
Online
Although
on-premises software continues to be an important part of our business,
increasingly we are delivering additional value to customers through
cloud-based services. We provide online content services to consumers through
Bing, MSN portals and channels, Office 365, Windows Phone Store, Xbox Live,
Outlook.com, OneDrive, Skype, and Windows Store. We also provide commercial
cloud-based services such as Dynamics CRM Online, Microsoft Azure, and Office
365. Other services delivered online include our online advertising platform
with offerings for advertisers and publishers, as well as Microsoft Developer
Network subscription content and updates, periodic product updates, and online
technical and practice readiness resources to support our partners in
developing and selling our products and solutions. As we increasingly deliver
online services, we sell many of these cloud-based services through our
enterprise agreements and have also enabled new sales programs to reach small
and medium-sized businesses. These programs include direct sales, direct
sales supported by a large network of partner advisors, and resale of services
through operator channels, such as telephone, cell, and cable providers.
We
also sell our products through our Microsoft retail stores and online
marketplaces.
LICENSING OPTIONS
We
license software to organizations under agreements that allow the customer to
acquire multiple licenses of products and services. Our agreements for
organizations to acquire multiple licenses of products and services are
designed to provide them with a means of doing so without having to acquire
separate licenses through retail channels. In delivering organizational
licensing agreements to the market, we use different programs designed to
provide flexibility for organizations of various sizes. While these programs
may differ in various parts of the world, generally they include those
discussed below.
Customer Licensing Programs
Open Licensing
Designed
primarily for small-to-medium organizations, the Open Programs allow customers
to acquire perpetual or subscription licenses and, at the customerŐs election,
rights to future versions of software products over a specified time period
(two or three years depending on the Open Programs used). The offering that
conveys rights to future versions of certain software products over the contract
period is called software assurance. Software assurance also provides support,
tools, and training to help customers deploy and use software efficiently. The Open
Programs have several variations to fit customersŐ diverse ways of purchasing.
Under the Open License Program, customers can acquire licenses only or licenses
with software assurance, and/or renew software assurance upon the expiration of
other existing volume licensing agreements. Under the Open Value and Open Value
Subscription programs, customers can acquire perpetual or subscription
licenses, respectively, over a three-year period. Online services are available
in each of the Open Programs.
Microsoft Product and Services Agreement
Suited for medium-to-large organizations, the Microsoft Products and Services Agreement (ŇMPSAÓ) provides customers the ability to purchase online services subscriptions, software licenses, software licenses with software assurance, and renewals of software assurance through a single agreement. Software assurance and online services subscriptions are generally available up to three years.
Select Plus Licensing
Designed
primarily for medium-to-large organizations, the Select Plus Program allows
customers to acquire perpetual licenses and, at the customerŐs election,
software assurance over a specified time period (generally three years or
less). Similar to Open Programs, the Select Plus Program allows customers to
acquire licenses only, acquire licenses with software assurance, or renew software
assurance upon the expiration of existing volume licensing agreements. A subset
of online services are also available for purchase through the Select Plus
Program, and subscriptions are generally structured with terms between one and
three years. In July 2014, we announced that we would no longer sign new Select
Plus agreements with commercial organizations starting July 2015, and
encouraged customers who want to purchase licenses to transition to the MPSA.
We expect Select Plus business to transition to the MPSA within a few years.
Enterprise Agreement Licensing
Designed
primarily for medium- and large-sized organizations that want to acquire
licenses to online services and/or software products, along with software
assurance and obtain the best value by standardizing on a common IT platform
across the organization. Enterprises can elect to acquire perpetual licenses
or, under the Enterprise Subscription option, can acquire non-perpetual,
subscription licenses for a specified period (generally three years). Online services
are also available for purchase through the enterprise agreement and
subscriptions are generally structured with three-year terms.
Customer Licensing Programs - Online
Services Only
Microsoft
Online Subscription Agreement is designed to enable small and medium-sized
businesses to easily purchase Microsoft Online Services. The program allows
customers to acquire monthly or annual subscriptions for cloud-based services.
Partner Programs
The Microsoft Cloud Solution Provider program enables partners to directly manage their entire Microsoft cloud customer lifecycle. Partners in this program use dedicated in-product tools to directly provision, manage, and support their customer subscriptions. Partners can easily package their own tools, products, and services, and combine them into one monthly or annual customer bill.
The
Microsoft Services Provider License Agreement is a program targeted at service
providers and independent software vendors allowing these partners to provide
software services and hosted applications to their end customers. Agreements
are generally structured with a three-year term, and partners are billed
monthly based upon consumption.
Microsoft
Online Services Reseller Agreement is a program enabling partners to package
Microsoft online services with the partnersŐ services.
Independent Software Vendor Royalty Program
is a program that enables partners to use Microsoft software in their own
software programs.
CUSTOMERS
Our
customers include individual consumers, small- and medium-sized organizations, large
global enterprises, public sector institutions, Internet service providers,
application developers, and OEMs. No sales to an individual customer accounted
for more than 10% of fiscal year 2015, 2014, or 2013 revenue. Our practice is
to ship our products promptly upon receipt of purchase orders from customers;
consequently, backlog is not significant.
EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive
officers as of July 30, 2015 were as follows:
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Name |
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Age |
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Position with the Company |
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Satya Nadella |
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47 |
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Chief
Executive Officer |
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Christopher C. Capossela |
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45 |
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Executive
Vice President, Chief Marketing Officer |
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Kathleen T. Hogan |
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49 |
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Executive Vice President, Human Resources |
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Amy E. Hood |
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43 |
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Executive Vice President, Chief Financial Officer |
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Margaret Johnson |
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53 |
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Executive Vice President, Business Development |
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Bradford L. Smith |
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56 |
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Executive Vice President, General Counsel; Secretary |
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B. Kevin Turner |
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50 |
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Chief Operating
Officer |
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Mr. Nadella
was appointed Chief Executive Officer in February 2014. He served as Executive
Vice President, Cloud and Enterprise beginning July 2013. From 2011 to 2013,
Mr. Nadella served as President, Server and Tools. From 2009 to 2011, he
was Senior Vice President, Online Services Division. From 2008 to 2009, he was
Senior Vice President, Search, Portal, and Advertising. Since joining Microsoft
in 1992, Mr. NadellaŐs roles included Vice President of Microsoft Business
Division.
Mr. Capossela
was appointed Executive Vice President, Chief Marketing Officer in March
2014. Previously, he served as the worldwide leader of the Consumer
Channels Group, responsible for sales and marketing activities with OEMs,
operators, and retail partners. In his more than 20 years at Microsoft,
Mr. Capossela has held a variety of marketing leadership roles in the
Microsoft Office Division. He was responsible for marketing productivity
solutions including Microsoft Office, Office 365, SharePoint, Exchange, Skype
for Business, Project, and Visio.
Ms. Hogan was appointed Executive Vice
President, Human Resources in November 2014. Prior to that Ms. Hogan was
Corporate Vice President of Microsoft Services. She also served as Corporate
Vice President of Customer Service and Support. Ms. Hogan joined Microsoft in
2003.
Ms. Hood
was appointed Executive Vice President and Chief Financial Officer in July
2013, subsequent to her appointment as Chief Financial Officer in May 2013.
Beginning in 2010, Ms. Hood was Chief Financial Officer of the Microsoft
Business Division. From 2006 through 2009, Ms. Hood was General Manager,
Microsoft Business Division Strategy. Since joining Microsoft in 2002,
Ms. Hood has also held finance-related positions in the Server and Tools
Business and the corporate finance organization.
Ms.
Johnson was appointed Executive Vice President, Business Development in
September 2014. Prior to that Ms. Johnson spent 24 years at Qualcomm in various
leadership positions across engineering, sales, marketing and business development.
She most recently served as Executive Vice President of Qualcomm Technologies,
Inc. Ms. Johnson also serves on the Board of Directors of Live Nation
Entertainment, Inc.
Mr. Smith
was appointed Executive Vice President, General Counsel, and Secretary in 2011.
Prior to that he served as Senior Vice President, General Counsel, and
Secretary since November 2001. Mr. Smith was also named Chief Compliance
Officer in 2002. He had been Deputy General Counsel for Worldwide Sales and
previously was responsible for managing the European Law and Corporate Affairs
Group, based in Paris. Mr. Smith joined Microsoft in 1993. Mr. Smith also
serves on the Board of Directors of Netflix, Inc.
Mr. Turner was appointed Chief Operating
Officer in September 2005. Before joining Microsoft, he was Executive Vice
President of Wal-Mart Stores, Inc. and President and Chief Executive Officer of
the SamŐs Club division. From 2001 to 2002, he served as Executive Vice
President and Chief Information Officer of Wal-MartŐs Information Systems
Division. From 2000 to 2001, he served as its Senior Vice President and Chief
Information Officer of the Information Systems Division. Mr. Turner also
serves on the Board of Directors of Nordstrom, Inc.
EMPLOYEES
As of June 30,
2015, we employed approximately 118,000 people on a full-time basis, 60,000 in
the U.S. and 58,000 internationally. Of the total employed people, 39,000 were
in product research and development, 29,000 in sales and marketing, 32,000 in
product support and consulting services, 8,000 in manufacturing and
distribution, and 10,000 in general and administration. In June 2015, management
approved a restructuring plan that will eliminate up to 7,800 positions in
fiscal year 2016, primarily in our Phone Hardware business. As a result of the
NDS acquisition, we have certain employees that are subject to collective
bargaining agreements.
AVAILABLE INFORMATION
Our Internet
address is www.microsoft.com. At our Investor Relations website,
www.microsoft.com/investor, we make available free of charge a variety of
information for investors. Our goal is to maintain the Investor Relations
website as a portal through which investors can easily find or navigate to
pertinent information about us, including:
Ľ Our annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments
to those reports, as soon as reasonably practicable after we electronically
file that material with or furnish it to the Securities and Exchange Commission
(ŇSECÓ).
Ľ Information on our
business strategies, financial results, and key performance indicators.
Ľ Announcements of investor
conferences, speeches, and events at which our executives talk about our
product, service, and competitive strategies. Archives of these events are also
available.
Ľ Press releases on quarterly
earnings, product and service announcements, legal developments, and
international news.
Ľ Corporate governance information
including our articles of incorporation, bylaws, governance guidelines,
committee charters, codes of conduct and ethics, global corporate citizenship
initiatives, and other governance-related policies.
Ľ Other
news and announcements that we may post from time to time that investors might
find useful or interesting.
Ľ Opportunities
to sign up for email alerts and RSS feeds to have information pushed in real
time.
The
information found on our website is not part of this or any other report we file
with, or furnish to, the SEC. In addition to these channels, we use social
media to communicate to the public. It is possible that the information we post
on social media could be deemed to be material to investors. We encourage
investors, the media, and others interested in Microsoft to review the
information we post on the social media channels listed on our Investor
Relations website.
ITEM 1A. RISK FACTORS
Our
operations and financial results are subject to various risks and
uncertainties, including those described below, that could adversely affect our
business, financial condition, results of operations, cash flows, and the
trading price of our common stock.
We face intense competition across all markets for
our products and services, which may lead to lower revenue or operating
margins.
Competition in the technology sector
Our
competitors range in size from diversified global companies with significant
research and development resources to small, specialized firms whose narrower
product lines may let them be more effective in deploying technical, marketing,
and financial resources. Barriers to entry in many of our businesses are low
and many of the areas in which we compete evolve rapidly with changing and
disruptive technologies, shifting user needs, and frequent introductions of new
products and services. Our ability to remain competitive depends on our success
in making innovative products, devices, and services that appeal to businesses
and consumers.
Competition among platforms, ecosystems, and
devices
An important element of our business model has been
to create platform-based ecosystems on which many participants can build
diverse solutions. A well-established ecosystem creates beneficial network
effects among users, application developers, and the platform provider that can
accelerate growth. Establishing significant scale in the marketplace is
necessary to achieve and maintain attractive margins. We face significant
competition from firms that provide competing platforms, applications, and
services.
Ľ A
competing vertically-integrated model, in which a single firm controls the
software and hardware elements of a product and related services, has succeeded
with some consumer products such as personal computers, tablets, phones, gaming
consoles, and wearables. Competitors pursuing this model also earn revenue from
services integrated with the hardware and software platform. We also offer some
vertically-integrated hardware and software products and services; however, our
competitors in smartphones and tablets have established significantly larger
user bases. Shifting a portion of our business to a vertically integrated model
will increase our cost of revenue and reduce our operating margins.
Ľ We
derive substantial revenue from licenses of Windows operating systems on
personal computers. We face significant competition from competing platforms
developed for new devices and form factors such as smartphones and tablet
computers. These devices compete on multiple bases including price and the
perceived utility of the device and its platform. Users are increasingly
turning to these devices to perform functions that in the past were performed
by personal computers. Even if many users view these devices as complementary
to a personal computer, the prevalence of these devices may make it more
difficult to attract application developers to our PC operating system
platforms. Competing with operating systems licensed at low or no cost may
decrease our PC operating system margins. In addition, some of our devices compete
with products made by our OEM partners, which may affect their commitment to
our platform.
Ľ The
success of the Windows Phone platform is an important element of our goal to
enhance personal productivity in a mobile-first and cloud-first world. The
marketplace among mobile phone platforms is highly competitive. We may face
issues in selecting, engaging, or securing support from operators and retailers
for Windows phones due to, for instance, inadequate sales training or
incentives, or insufficient marketing support for the Windows Phone platform.
Ľ Competing
platforms have application marketplaces (sometimes referred to as ŇstoresÓ)
with scale and significant installed bases. The variety and utility of
applications available on a platform are important to device purchasing
decisions. Users incur costs to move data and buy new applications when
switching platforms. To compete, we must successfully enlist developers to
write applications for our marketplace and ensure that these applications have
high quality, customer appeal, and value. Efforts to compete with competitorsŐ
application marketplaces may increase our cost of revenue and lower our
operating margins.
Business model competition
Companies compete with us based on a growing
variety of business models.
Ľ Even
as we transition to a mobile-first and cloud-first strategy, the license-based
proprietary software model generates most of our software revenue. We bear the
costs of converting original ideas into software products through investments in
research and development, offsetting these costs with the revenue received from
licensing our products. Many of our competitors also develop and sell software
to businesses and consumers under this model.
Ľ Other
competitors develop and offer free applications, online services and content,
and make money by selling third-party advertising. Advertising revenue funds
development of products and services these competitors provide to users at no
or little cost, competing directly with our revenue-generating products.
Ľ Some
companies compete with us using an open source business model by modifying and
then distributing open source software at nominal cost to end-users, and
earning revenue on advertising or complementary services and products. These
firms do not bear the full costs of research and development for the software.
Some open source software vendors develop software that mimics the features and
functionality of our products.
The
competitive pressures described above may cause decreased sales volumes, price
reductions, and/or increased operating costs, such as for research and
development, marketing, and sales incentives. This may lead to lower revenue,
gross margins, and operating income.
Our increasing focus on
services presents execution and competitive risks. A growing part of our
business involves cloud-based services available across the spectrum of
computing devices. Our strategic vision is to compete and grow as a productivity
and platform company for the mobile-first and cloud-first world. At the same
time, our competitors are rapidly developing and deploying cloud-based services
for consumers and business customers. Pricing and delivery models are evolving.
Devices and form factors influence how users access services in the cloud and
sometimes the userŐs choice of which suite of cloud-based services to use. We
are devoting significant resources to develop and deploy our cloud-based
strategies. The Windows ecosystem must continue to evolve with this changing
environment. We are undertaking cultural and organizational changes to drive
accountability and eliminate obstacles to innovation. The CompanyŐs increasing
reliance on data-driven insights is becoming more important to the success of
key opportunities in monetization, customer perceptions of quality, and
operational efficiency. Besides software development costs, we are incurring
costs to build and maintain infrastructure to support cloud computing services.
These costs will reduce the operating margins we have previously achieved.
Whether we succeed in cloud-based services depends on our execution in several
areas, including:
Ľ Continuing
to bring to market compelling cloud-based experiences that generate increasing
traffic and market share.
Ľ Maintaining
the utility, compatibility, and performance of our cloud-based services on the
growing array of computing devices, including PCs, smartphones, tablets, gaming
consoles, and other television-related devices.
Ľ Continuing
to enhance the attractiveness of our cloud platforms to third-party developers.
Ľ Ensuring
our cloud-based services meet the reliability expectations of our customers and
maintain the security of their data.
Ľ Making
our suite of cloud-based services platform agnostic, available on a wide range
of devices and ecosystems, including those of our competitors.
It
is uncertain whether our strategies will attract the users or generate the
revenue required to succeed. If we are not effective in executing
organizational and technical changes to increase efficiency and accelerate
innovation, or if we fail to generate sufficient usage of our new products and
services, we may not grow revenue in line with the infrastructure and
development investments described above. This may negatively impact gross
margins and operating income.
We make significant investments in new products and services that may
not achieve expected returns. We will continue to make significant investments in
research, development, and marketing for existing products, services, and
technologies, including the Windows operating system, the Microsoft Office
system, Bing, Windows Phone, Windows Server, the Windows Store, the Microsoft
Azure Services platform, Office 365, other cloud-based services offerings, and
the Xbox entertainment platform. We also invest in the development and
acquisition of a variety of hardware for productivity, communication, and
entertainment including PCs, tablets, phones, and gaming devices. Investments in
new technology are speculative. Commercial success depends on many factors,
including innovativeness, developer support, and effective distribution and
marketing. If customers do not perceive our latest offerings as providing
significant new functionality or other value, they may reduce their purchases
of new software and hardware products or upgrades, unfavorably affecting
revenue. We may not achieve significant revenue from new product, service, and
distribution channel investments for several years, if at all. New products and
services may not be profitable, and even if they are profitable, operating
margins for some new products and businesses will not be as high as the margins
we have experienced historically.
The
launch of Windows 10, with free upgrades available to existing users of Windows
7 and 8.1, constitutes the most ambitious update effort we have ever
undertaken. We have done extensive preparation and compatibility testing for
applications and devices to help ensure a positive experience for our users
installing Windows 10. However, if users have a negative upgrade experience, or
the community reacts negatively to the process we are following to promote and
undertake the upgrades, the reception of Windows 10 in the marketplace may
be harmed. In addition, we anticipate that Windows 10 will enable new
post-license monetization opportunities beyond initial license
revenues. Our failure to realize these opportunities to the extent we
expect could have an adverse impact on our revenues.
Developing
new technologies is complex. It can require long development and testing
periods. Significant delays in new releases or significant problems in creating
new products or services could adversely affect our revenue.
Acquisitions, joint ventures, and strategic alliances may have an
adverse effect on our business. We expect to continue making acquisitions and
entering into joint ventures and strategic alliances as part of our long-term
business strategy. These transactions and arrangements involve significant
challenges and risks including that they do not advance our business strategy,
that we get an unsatisfactory return on our investment, that we have difficulty
integrating new employees, business systems, and technology, or that they
distract management from our other businesses. If an arrangement fails to
adequately anticipate changing circumstances and interests of a party, it may
result in early termination or renegotiation of the arrangement. The success of
these transactions and arrangements will depend in part on our ability to
leverage them to enhance our existing products and services or develop
compelling new ones. It may take longer than expected to realize the full
benefits from these transactions and arrangements, such as increased revenue, enhanced
efficiencies, or increased market share, or the benefits may ultimately be
smaller than we expected. These events could adversely affect our operating
results or financial condition.
If our goodwill or amortizable intangible assets become impaired we may
be required to record a significant charge to earnings. We acquire other companies
and intangible assets and may not realize all the economic benefit from those
acquisitions, which could cause an impairment of goodwill or intangibles. We
review our amortizable intangible assets for impairment when events or changes
in circumstances indicate the carrying value may not be recoverable. We test
goodwill for impairment at least annually. Factors that may be a change in
circumstances, indicating that the carrying value of our goodwill or
amortizable intangible assets may not be recoverable, include a decline in our
stock price and market capitalization, reduced future cash flow estimates, and
slower growth rates in industry segments in which we participate. We may be
required to record a significant charge in our consolidated financial
statements during the period in which any impairment of our goodwill or
amortizable intangible assets is determined, negatively affecting our results
of operations. For example, in the fourth quarter of fiscal year 2012, we
recorded a $6.2 billion charge for the impairment of goodwill in our previous
Online Services Division business (Devices and Consumer Other under our current
segment structure), and in the fourth quarter of fiscal year 2015, we recorded a
$5.1 billion charge for the impairment of goodwill and a $2.2 billion charge
for the impairment of intangible assets in our Phone Hardware segment.
We may not earn the revenues we expect from our
intellectual property rights.
We may not be able to adequately protect our
intellectual property rights
Protecting
our global intellectual property rights and combating unlicensed copying and
use of our software and other intellectual property is difficult. While piracy
adversely affects U.S. revenue, the impact on revenue from outside the U.S. is
more significant, particularly in countries where laws are less protective of
intellectual property rights. Our revenue in these markets may grow slower than
the underlying device market. Similarly, the absence of harmonized patent laws
makes it more difficult to ensure consistent respect for patent rights.
Throughout the world, we educate consumers about the benefits of licensing
genuine products and obtaining indemnification benefits for intellectual
property risks, and we educate lawmakers about the advantages of a business
climate where intellectual property rights are protected. Reductions in the
legal protection for software intellectual property rights could adversely
affect revenue.
We may not receive expected royalties from
our patent licenses
We
expend significant resources to patent the intellectual property we create with
the expectation that we will generate revenues by incorporating that
intellectual property in our products or services or, in some instances, by
licensing our patents to others in return for a royalty. Changes in the
law may weaken our ability to prevent the use of patented technology or collect
revenue for licensing our patents. These include legislative changes and
regulatory actions that make it more difficult to obtain injunctions, and the
increasing use of legal process to challenge issued patents. Similarly,
licensees of our patents may fail to satisfy their obligations to pay us
royalties, or may contest the scope and extent of their obligations. Finally,
the royalties we can obtain to monetize our intellectual property may decline
because of the evolution of technology, selling price changes in products using
licensed patents, or the difficulty of discovering infringements.
Third parties may claim we infringe their intellectual property rights. From time to time, others
claim we infringe their intellectual property rights. The number of these
claims may grow because of constant technological change in the markets in
which we compete, the extensive patent coverage of existing technologies, the
rapid rate of issuance of new patents, and our offering of first-party devices,
such as Surface and Lumia phones. To resolve these claims we may enter into
royalty and licensing agreements on terms that are less favorable than currently
available, stop selling or redesign affected products or services, or pay
damages to satisfy indemnification commitments with our customers. These
outcomes may cause operating margins to decline. Besides money damages, in some
jurisdictions plaintiffs can seek injunctive relief that may limit or prevent
importing, marketing, and selling our products or services that have infringing
technologies. In some countries, such as Germany, an injunction can be issued
before the parties have fully litigated the validity of the underlying patents.
We have paid significant amounts to settle claims related to the use of
technology and intellectual property rights and to procure intellectual
property rights as part of our strategy to manage this risk, and may continue
to do so.
We may not be able to protect our source code from copying if there is
an unauthorized disclosure of source code. Source code, the detailed program commands
for our operating systems and other software programs, is critical to our
business. Although we license portions of our application and operating system
source code to several licensees, we take significant measures to protect the
secrecy of large portions of our source code. If a significant portion of our
source code leaks, we might lose future trade secret protection for that source
code. It may become easier for third parties to compete with our products by
copying functionality, which could adversely affect our revenue and operating
margins. Unauthorized disclosure of source code also could increase the
security risks described in the next paragraph.
Cyber-attacks and security vulnerabilities could lead to reduced
revenue, increased costs, liability claims, or harm to our competitive
position.
Security of MicrosoftŐs information technology
Threats
to IT security can take a variety of forms. Individual and groups of hackers,
and sophisticated organizations including state-sponsored organizations or
nation-states themselves, may take steps that pose threats to our customers and
our IT. They may develop and deploy malicious software to attack our
products and services and gain access to our networks and datacenters, or act
in a coordinated manner to launch distributed denial of service or other
coordinated attacks. Cyber threats are constantly evolving, thereby increasing
the difficulty of detecting and successfully defending against them. Cyber
threats can have cascading impacts that unfold with increasing speed across our
internal networks and systems, and those of our partners and customers.
Breaches of our network or data security could disrupt the security of our
internal systems and business applications, impair our ability to provide
services to our customers and protect the privacy of their data, result in
product development delays, compromise confidential or technical business
information harming our competitive position, result in theft or misuse of our
intellectual property or other assets, require us to allocate more resources to
improved technologies, or otherwise adversely affect our business.
In
addition, our internal IT environment continues to evolve. Often we are early
adopters of new devices and technologies. We embrace new ways of sharing data
and communicating internally and with partners and customers using methods such
as social networking and other consumer-oriented technologies. Our business
policies and internal security controls may not keep pace with these changes as
new threats emerge.
Security of our products, services, devices,
and customersŐ data
Security
threats are a particular challenge to companies like us whose business is
technology products and services. Threats to our own IT infrastructure can also
affect our customers. Customers using our cloud-based services rely on the
security of our infrastructure to ensure the reliability of our services and
the protection of their data. Hackers tend to focus their efforts on the most
popular operating systems, programs, and services, including many of ours, and
we expect that to continue. The security of our products and services is
important in our customersŐ purchasing decisions.
To
defend against security threats, both to our internal IT systems and those of
our customers, we must continuously engineer more secure products and services,
enhance security and reliability features, improve the deployment of software
updates to address security vulnerabilities, develop mitigation technologies
that help to secure customers from attacks even when software updates are not
deployed, maintain the digital security infrastructure that protects the
integrity of our network, products, and services, and provide customers
security tools such as firewalls and anti-virus software.
The
cost of these steps could reduce our operating margins. If we fail to do these
things well, actual or perceived security vulnerabilities in our products and
services could harm our reputation and lead customers to reduce or delay future
purchases of products or subscriptions to services, or to use competing
products or services. Customers may also spend more on protecting their
existing computer systems from attack, which could delay adoption of additional
products or services. Customers may fail to update their systems, continue to
run software or operating systems we no longer support, or may fail timely to
install security patches. Any of these actions by customers could adversely
affect our revenue. Actual or perceived vulnerabilities may lead to claims
against us. Although our license agreements typically contain provisions that
eliminate or limit our exposure to liability, there is no assurance these
provisions will withstand legal challenges. Legislative or regulatory action in
these areas may increase the costs to develop, implement, or secure our
products and services.
Disclosure of personal data could cause liability and harm our
reputation. As
we continue to grow the number and scale of our cloud-based offerings, we store
and process increasingly large amounts of personally identifiable information
of our customers. The continued occurrence of high-profile data breaches
provides evidence of an external environment increasingly hostile to
information security. Despite our efforts to improve the security controls
across our business groups and geographies, it is possible our security
controls over personal data, our training of employees and vendors on data
security, and other practices we follow may not prevent the improper disclosure
of customer data we or our vendors store and manage. Improper disclosure could
harm our reputation, lead to legal exposure to customers, or subject us to
liability under laws that protect personal data, resulting in increased costs
or loss of revenue. Our software products and services also enable our
customers to store and process personal data on-premises or, increasingly, in a
cloud-based environment we host. Government authorities can sometimes require
us to produce customer data in response to valid legal orders. In the U.S. and
elsewhere, we advocate for transparency concerning these requests and
appropriate limitations on government authority to compel disclosure. Despite
our efforts to protect customer data, perceptions that the privacy of personal
information is not satisfactorily protected could inhibit sales of our products
or services, and could limit adoption of our cloud-based solutions by
consumers, businesses, and government entities. Additional security measures we
may take to address customer concerns, or constraints on our flexibility to
determine where and how to operate datacenters in response to customer expectations
or governmental rules or actions, may cause higher operating expenses.
We may have outages, data losses, and disruptions of our online services
if we fail to maintain an adequate operations infrastructure. Our increasing user
traffic, growth in services, and the complexity of our products and services
demand more computing power. We spend substantial amounts to build, purchase,
or lease datacenters and equipment and to upgrade our technology and network
infrastructure to handle more traffic on our websites and in our datacenters.
These demands continue to increase as we introduce new products and services
and support the growth of existing services such as Bing, Exchange Online,
Office 365, SharePoint Online, OneDrive, Skype, Xbox Live, Microsoft Azure,
Outlook.com, Windows Stores, and Microsoft Account services. We are rapidly
growing our business of providing a platform and back-end hosting for services
provided by third parties to their end users. Maintaining, securing, and
expanding this infrastructure is expensive and complex. It requires that we
maintain an Internet connectivity infrastructure that is robust and reliable
within competitive and regulatory constraints that continue to evolve. Inefficiencies
or operational failures, including temporary or permanent loss of customer data
or insufficient Internet connectivity, could diminish the quality of our
products, services, and user experience resulting in contractual liability,
claims by customers and other third parties, damage to our reputation and loss
of current and potential users, subscribers, and advertisers, each of which may
harm our operating results and financial condition.
Government litigation and regulatory activity relating to competition
rules may limit how we design and market our products. As a leading global
software and device maker, we are closely scrutinized by government agencies
under U.S. and foreign competition laws. An increasing number of governments
are regulating competition law activities and this includes increased scrutiny
in potentially large markets such as the European Union, the U.S., and China.
Some jurisdictions also allow competitors or consumers to assert claims of
anti-competitive conduct. U.S. federal and state antitrust authorities have
previously brought enforcement actions and continue to scrutinize our business.
The
European Commission (Ňthe CommissionÓ) closely scrutinizes the design of
high-volume Microsoft products and the terms on which we make certain
technologies used in these products, such as file formats, programming
interfaces, and protocols, available to other companies. In 2004, the
Commission ordered us to create new versions of our Windows operating system
that do not include certain multimedia technologies and to provide our
competitors with specifications for how to implement certain proprietary
Windows communications protocols in their own products. In 2009, the Commission
accepted a set of commitments offered by Microsoft to address the CommissionŐs
concerns relating to competition in web browsing software, including an
undertaking to address Commission concerns relating to interoperability. The
web browsing commitments expired in 2014. The remaining obligations may limit
our ability to innovate in Windows or other products in the future, diminish
the developer appeal of the Windows platform, and increase our product
development costs. The availability of licenses related to protocols and file
formats may enable competitors to develop software products that better mimic
the functionality of our products, which could hamper sales of
our products.
Our portfolio of first-party devices continues to
grow; at the same time our OEM partners offer a large variety of devices on our
platforms. As a result, increasingly we both cooperate and compete with our OEM
partners, creating a risk that we fail to do so in compliance with competition
rules. Regulatory scrutiny in this area may increase. Certain foreign
governments, particularly in China and other countries in Asia, have advanced
arguments under their competition laws that exert downward pressure on
royalties for our intellectual property. Because these jurisdictions only
recently implemented competition laws, their enforcement activities are
unpredictable.
Government regulatory actions and court decisions
such as these may hinder our ability to provide the benefits of our software to
consumers and businesses, reducing the attractiveness of our products and the
revenue that come from them. New competition law actions could be initiated.
The outcome of such actions, or steps taken to avoid them, could adversely
affect us in a variety of ways, including:
Ľ We
may have to choose between withdrawing products from certain geographies to
avoid fines or designing and developing alternative versions of those products
to comply with government rulings, which may entail a delay in a product
release and removing functionality that customers want or on which developers
rely.
Ľ We
may be required to make available licenses to our proprietary technologies on
terms that do not reflect their fair market value or do not protect our
associated intellectual property.
Ľ The
rulings described above may be precedent in other competition law proceedings.
Ľ We
are subject to a variety of ongoing commitments because of court or
administrative orders, consent decrees, or other voluntary actions we have
taken. If we fail to comply with these commitments, we may incur litigation
costs and be subject to substantial fines or other remedial actions.
Ľ Our ability
to realize anticipated Windows 10 post-sale monetization opportunities may be
limited.
Our global operations subject us to potential liability under
anti-corruption, trade protection, and other laws and regulations. The Foreign Corrupt
Practices Act and other anti-corruption laws and regulations (ŇAnti-Corruption
LawsÓ) prohibit corrupt payments by our employees, vendors, or agents. From
time to time, we receive inquiries from authorities in the U.S. and elsewhere
about our business activities outside the U.S. and our compliance with
Anti-Corruption Laws. While we devote substantial resources to our global
compliance programs and have implemented policies, training, and internal
controls designed to reduce the risk of corrupt payments, our employees,
vendors, or agents may violate our policies. Our failure to comply with
Anti-Corruption Laws could result in significant fines and penalties, criminal
sanctions against us, our officers, or our employees, prohibitions on the
conduct of our business, and damage to our reputation. Operations outside the
U.S. may be affected by changes in trade protection laws, policies, and measures,
and other regulatory requirements affecting trade and investment. We may be
subject to legal liability and reputational damage if we sell goods or services
in violation of U.S. trade sanctions on countries such as Iran, North Korea,
Cuba, Sudan, and Syria.
Other
regulatory areas that may apply to our products and online services offerings
include user privacy, telecommunications, data storage and protection, and
online content. For example, regulators may take the position that our
offerings such as Skype are covered by laws regulating telecommunications
services. Applying these laws and regulations to our business is often unclear,
subject to change over time, and sometimes may conflict from jurisdiction to
jurisdiction. Additionally, these laws and governmentsŐ approach to their
enforcement, and our products and services, are continuing to evolve.
Increasing concern about government surveillance practices around the world may
lead to increased regulation requiring local data hosting obligations or the
use of domestic hosting providers. Compliance with these types of regulation
may involve significant costs or require changes in products or business
practices that result in reduced revenue. Noncompliance could result in the imposition
of penalties or orders we stop the alleged noncompliant activity. Geopolitical
instability may lead to sanctions and impact our ability to do business in some
geographies.
Our business depends on our ability to attract and retain talented
employees. Our
business is based on successfully attracting and retaining talented employees.
The market for highly skilled workers and leaders in our industry is extremely
competitive. We are limited in our ability to recruit internationally by
restrictive domestic immigration laws. If we are less successful in our
recruiting efforts, or if we cannot retain key employees, our ability to
develop and deliver successful products and services may be adversely affected.
Effective succession planning is also important to our long-term success.
Failure to ensure effective transfer of knowledge and smooth transitions
involving key employees could hinder our strategic planning and execution.
We have claims and lawsuits against us that may result in adverse
outcomes. We
are subject to a variety of claims and lawsuits. Adverse outcomes in some or
all of these claims may result in significant monetary damages or injunctive
relief that could adversely affect our ability to conduct our business. The
litigation and other claims are subject to inherent uncertainties and
managementŐs view of these matters may change in the future. A material adverse
impact on our consolidated financial statements could occur for the period in
which the effect of an unfavorable final outcome becomes probable and
reasonably estimable.
We may have additional tax liabilities. We are subject to income
taxes in the U.S. and many foreign jurisdictions. Significant judgment is
required in determining our worldwide provision for income taxes. In the
ordinary course of our business, there are many transactions and calculations
where the ultimate tax determination is uncertain. We regularly are under audit
by tax authorities. Economic and political pressures to increase tax
revenue in various jurisdictions may make resolving tax disputes favorably more
difficult. Although we believe our tax estimates are reasonable, the final
determination of tax audits and any related litigation could be materially
different from our historical income tax provisions and accruals. The results
of an audit or litigation could have a material effect on our consolidated
financial statements in the period or periods in which that determination is
made.
We
earn a significant amount of our operating income from outside the U.S., and any
repatriation of funds currently held in foreign jurisdictions to the U.S. may
result in higher effective tax rates for the company. In addition, there have
been proposals from Congress to change U.S. tax laws that would significantly
impact how U.S. multinational corporations are taxed on foreign earnings.
Although we cannot predict whether or in what form any proposed legislation may
pass, if enacted, it could have a material adverse impact on our tax expense
and cash flows.
Our hardware and software products may experience quality or supply
problems. Our
vertically-integrated hardware products such as Xbox consoles, Surface devices,
phones, and other devices we design, manufacture, and market are highly complex
and can have defects in design, manufacture, or associated software. We could
incur significant expenses, lost revenue, and reputational harm if we fail to
detect or address such issues through design, testing, or warranty repairs. We
acquire some device components from sole suppliers. Our competitors use some of
the same suppliers and their demand for hardware components can affect the
capacity available to us. If a component from a sole-source supplier is delayed
or becomes unavailable, whether because of supplier capacity constraint or
industry shortages, we may not obtain timely replacement supplies, resulting in
reduced sales. Component shortages, excess or obsolete inventory, or price
reductions resulting in inventory adjustments may increase our cost of revenue.
Xbox consoles, Surface devices, phones, and other hardware are assembled in
Asia and other geographies that may be subject to disruptions in the supply
chain, resulting in shortages that would affect our revenue and operating
margins. These same risks would apply to any other vertically-integrated
hardware and software products we may offer.
Our
software products also may experience quality or reliability problems. The
highly sophisticated software products we develop may contain bugs and other
defects that interfere with their intended operation. Any defects we do not
detect and fix in pre-release testing could cause reduced sales and revenue,
damage to our reputation, repair or remediation costs, delays in the release of
new products or versions, or legal liability. Although our license agreements
typically contain provisions that eliminate or limit our exposure to liability,
there is no assurance these provisions will withstand legal challenge.
Our global business exposes us to operational and economic risks. Our customers are located
in over 200 countries and a significant part of our revenue comes from
international sales. The global nature of our business creates operational and
economic risks. Emerging markets are a significant focus of our international
growth strategy. The developing nature of these markets presents several risks,
including deterioration of social, political, labor, or economic conditions in
a country or region, and difficulties in staffing and managing foreign
operations. Although we hedge a portion of our international currency exposure,
significant fluctuations in foreign exchange rates between the U.S. dollar and
foreign currencies may adversely affect our revenue. Competitive or regulatory
pressure to make our pricing structure uniform might require that we reduce the
sales price of our software in the U.S. and other countries.
Catastrophic events or geopolitical conditions may disrupt our business.
A
disruption or failure of our systems or operations because of a major
earthquake, weather event, cyber-attack, terrorist attack, or other
catastrophic event could cause delays in completing sales, providing services,
or performing other critical functions. Our corporate headquarters, a
significant portion of our research and development activities, and certain other
essential business operations are in the Seattle, Washington area, and we have
other business operations in the Silicon Valley area of California, both of
which are seismically active regions. A catastrophic event that results in the
destruction or disruption of any of our critical business or IT systems could
harm our ability to conduct normal business operations. Providing our customers
with more services and solutions in the cloud puts a premium on the resilience
of our systems and strength of our business continuity management plans, and
magnifies the potential impact of prolonged service outages on our operating
results.
Abrupt political change, terrorist activity, and
armed conflict pose a risk of general economic disruption in affected
countries, which may increase our operating costs. These conditions also may
add uncertainty to the timing and budget for technology investment decisions by
our customers, and may cause supply chain disruptions for hardware
manufacturers, either of which may adversely affect our revenue. The long-term
effects of climate change on the global economy or the IT industry in
particular are unclear. Environmental regulations or changes in the supply,
demand or available sources of energy or other natural resources may affect the
availability or cost of goods and services, including natural resources,
necessary to run our business. Changes in weather where we operate may increase
the costs of powering and cooling computer hardware we use to develop software
and provide cloud-based services.
Adverse economic or market conditions may harm our business. Worsening economic
conditions, including inflation, recession, or other changes in economic
conditions, may cause lower IT spending and adversely affect our revenue. If
demand for PCs, servers, and other computing devices declines, or consumer or
business spending for those products declines, our revenue will be adversely
affected. Substantial revenue comes from our U.S. government contracts. An
extended federal government shutdown resulting from failing to pass budget
appropriations, adopt continuing funding resolutions or raise the debt ceiling,
and other budgetary decisions limiting or delaying federal government spending,
could reduce government IT spending on our products and services and adversely
affect our revenue.
Our product distribution system relies on an
extensive partner and retail network. OEMs building devices that run our
software have also been a significant means of distribution. The impact of
economic conditions on our partners, such as the bankruptcy of a major
distributor, OEM, or retailer, could cause sales channel disruption.
Challenging
economic conditions also may impair the ability of our customers to pay for
products and services they have purchased. As a result, allowances for doubtful
accounts and write-offs of accounts receivable may increase.
We
maintain an investment portfolio of various holdings, types, and maturities.
These investments are subject to general credit, liquidity, market, and
interest rate risks, which may be exacerbated by unusual events that affect
global financial markets. A significant part of our investment portfolio
comprises U.S. government securities. If global credit and equity markets
decline for long periods, or if there is a downgrade of the U.S. government
credit rating due to an actual or threatened default on government debt, our
investment portfolio may be adversely affected and we could determine that more
of our investments have experienced an other-than-temporary decline in fair
value, requiring impairment charges that could adversely affect our financial
results.
ITEM 1B. UNRESOLVED STAFF COMMENTS
We have
received no written comments regarding our periodic or current reports from the
staff of the SEC that were issued 180 days or more preceding the end of our
fiscal year 2015 that remain unresolved.
ITEM 2. PROPERTIES
Our
corporate offices consist of approximately 15 million square feet of
office space located in King County, Washington: 10 million square feet of
owned space situated on approximately 500 acres of land we own at our corporate
campus in Redmond, Washington and approximately five million square feet of
space we lease. We own approximately five million additional square feet
of office and data center space domestically (outside of the Puget Sound
corporate campus) and lease many sites domestically totaling approximately
five million square feet of office and data center space.
We
occupy many sites internationally, totaling approximately twelve million square
feet that is owned and approximately eleven million square feet that is
leased. International facilities that we own include: our research and development
centers in China and India; our phone manufacturing facilities, predominantly in
Vietnam; our regional operations centers in Ireland and Singapore; and our
facilities in UK. The largest leased office spaces include the following
locations: China; Finland; Germany; India; Japan; and UK. In addition to the
above locations, we have various product development facilities, both
domestically and internationally, as described in the ŇResearch and
DevelopmentÓ section of Item 1 of this Form 10-K.
Our
facilities are used for current operations of all segments, and suitable
additional spaces are available to accommodate expansion needs. We have a
development agreement with the City of Redmond under which we may currently
develop approximately 1.4 million square feet of additional facilities at
our corporate campus in Redmond, Washington.
ITEM 3. LEGAL PROCEEDINGS
See
Note 18 Đ Contingencies of the Notes to Financial Statements (Part II,
Item 8 of this Form 10-K) for information regarding legal proceedings in
which we are involved.
ITEM 4. MINE SAFETY DISCLOSURES
Not
applicable.
PART II
ITEM 5. MARKET FOR REGISTRANTŐS COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET AND STOCKHOLDERS
Our common stock is traded on the NASDAQ Stock
Market under the symbol MSFT. On July 27, 2015, there were 109,479
registered holders of record of our common stock. The high and low common stock
sales prices per share were as follows:
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Quarter Ended |
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September 30 |
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December 31 |
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March 31 |
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June 30 |
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Fiscal Year |
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Fiscal Year 2015 |
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High |
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$ 47.57 |
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$ 50.05 |
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$ 47.91 |
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$ 49.54 |
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$ 50.05 |
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Low |
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$ 41.05 |
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$ 42.10 |
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$ 40.23 |
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$ 40.12 |
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$ 40.12 |
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Fiscal Year 2014 |
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High |
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$ 36.43 |
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$ 38.98 |
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$ 41.50 |
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$ 42.29 |
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$ 42.29 |
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Low |
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$ 30.84 |
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$ 32.80 |
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$ 34.63 |
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$ 38.51 |
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$ 30.84 |
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DIVIDENDS AND SHARE REPURCHASES
See Note 19 Đ StockholdersŐ Equity of the Notes to
Financial Statements (Part II, Item 8 of this Form 10-K) for information
regarding dividends and share repurchases by quarter. Following are our monthly
stock repurchases for the fourth quarter of fiscal year 2015, all of which were
made as part of publicly announced plans or programs:
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Period |
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Total Number of Shares Purchased |
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Average Price Paid per Share |
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Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
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Approximate Dollar Value of Shares that May Yet be Purchased under the Plans or Programs |
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(in millions) |
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April 1, 2015 Đ
April 30, 2015 |
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45,393,872 |
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$ |
42.92 |
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45,393,872 |
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|
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$ 24,143 |
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May 1, 2015 Đ
May 31, 2015 |
|
|
23,541,167 |
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|
$ |
47.58 |
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|
23,541,167 |
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$ 23,023 |
|
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June 1, 2015 Đ June 30, 2015 |
|
|
24,705,187 |
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$ |
46.15 |
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24,705,187 |
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$ 21,883 |
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93,640,226 |
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93,640,226 |
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The
repurchases were made using cash resources and occurred in the open market.
ITEM 6. SELECTED FINANCIAL DATA
FINANCIAL HIGHLIGHTS
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(In millions, except per share data) |
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Year Ended June 30, |
|
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2015 |
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|
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2014 |
(b) |
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2013 |
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2012 |
|
|
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2011 |
|
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|||||||||||||||
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Revenue |
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$ |
93,580 |
|
|
$ |
86,833 |
|
|
$ |
77,849 |
|
|
$ |
73,723 |
|
|
$ |
69,943 |
|
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Gross margin |
|
$ |
60,542 |
|
|
$ |
59,755 |
|
|
$ |
57,464 |
|
|
$ |
56,193 |
|
|
$ |
54,366 |
|
|
Operating income |
|
$ |
18,161 |
(a) |
|
$ |
27,759 |
|
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$ |
26,764 |
(c) |
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$ |
21,763 |
(d) |
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$ |
27,161 |
|
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Net income |
|
$ |
12,193 |
(a) |
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$ |
22,074 |
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|
$ |
21,863 |
(c) |
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$ |
16,978 |
(d) |
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$ |
23,150 |
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Diluted earnings per share |
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$ |
1.48 |
(a) |
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$ |
2.63 |
|
|
$ |
2.58 |
(c) |
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$ |
2.00 |
(d) |
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$ |
2.69 |
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|
Cash dividends declared per share |
|
$ |
1.24 |
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$ |
1.12 |
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$ |
0.92 |
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$ |
0.80 |
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$ |
0.64 |
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Cash, cash equivalents,
and short-term investments |
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$ |
96,526 |
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$ |
85,709 |
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$ |
77,022 |
|
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$ |
63,040 |
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|
$ |
52,772 |
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Total assets |
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$ |
176,223 |
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$ |
172,384 |
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|
$ |
142,431 |
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|
$ |
121,271 |
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|
$ |
108,704 |
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Long-term obligations |
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$ |
46,282 |
|
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$ |
36,975 |
|
|
$ |
26,070 |
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|
$ |
22,220 |
|
|
$ |
22,847 |
|
|
StockholdersŐ equity |
|
$ |
80,083 |
|
|
$ |
89,784 |
|
|
$ |
78,944 |
|
|
$ |
66,363 |
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|
$ |
57,083 |
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(a)
Includes $7.5 billion of
goodwill and asset impairment charges related to Phone Hardware, and $2.5
billion of integration and restructuring expenses, primarily costs associated with our restructuring plans,
which decreased fiscal year 2015 operating income and net income by $10.0 billion
and diluted earnings per share (ŇEPSÓ) by $1.15.
(b) On April 25, 2014, we acquired substantially
all of NDS. NDS has been included in
our consolidated results of operations starting on the acquisition date.
(c) Includes
a charge related to a fine imposed by the European Commission in March 2013
which decreased operating income and net income by $733 million (Ű561 million)
and diluted EPS by $0.09. Also includes a charge for Surface RT inventory
adjustments recorded in the fourth quarter of fiscal year 2013, which decreased
operating income by $900 million, net income by $596 million, and diluted EPS
by $0.07.
(d) Includes
a goodwill impairment charge related to our previous Online Services Division
business segment (related to Devices and Consumer Other under our current
segment structure) which decreased operating income and net income by $6.2
billion and diluted EPS by $0.73.
ITEM 7. MANAGEMENTŐS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following ManagementŐs Discussion and Analysis (ŇMD&AÓ) is intended to help
the reader understand the results of operations and financial condition of
Microsoft Corporation. MD&A is provided as a supplement to, and should be
read in conjunction with, our consolidated financial statements and the accompanying
Notes to Financial Statements.
OVERVIEW
Microsoft
is a technology leader focused on building best-in-class platforms and productivity
services for a mobile-first, cloud-first world. We strive to empower every
person and every organization on the planet to achieve more. We develop and
market software, services, and devices that deliver new opportunities, greater
convenience, and enhanced value to peopleŐs lives.
We
generate revenue by developing, licensing, and supporting a wide range of
software products, by offering an array of services, including cloud-based
services to consumers and businesses, by designing, manufacturing, and selling
devices that integrate with our cloud-based services, and by delivering
relevant online advertising to a global audience. Our most significant expenses
are related to compensating employees, designing, manufacturing, marketing, and
selling our products and services, datacenter costs in support of our
cloud-based services, and income taxes.
Much
of our focus in fiscal year 2015 was toward transforming our organization to
support our strategy of building best-in-class platforms and productivity
services for a mobile-first, cloud-first world. We achieved product development
milestones, implemented organizational changes, and made strategic and tactical
moves to support the three central ambitions that support our strategy:
reinventing productivity and business processes; building the intelligent cloud
platform; and creating more personal computing.
Highlights
from fiscal year 2015 included:
Ľ
Momentum continued to grow in our Commercial Cloud and productivity
offerings as we surpassed an $8 billion annualized run rate* at the end of the
year.
Ľ
Office 365 Commercial seats grew 74%, and Office 365 is now deployed in
four out of five Fortune 500 enterprises, with more than half of that install
base using premium workloads. We also added over 50,000 small- and medium-sized
business customers each month.
Ľ
Server products and services revenue increased 9%, driven by growth
across our cloud and on-premises server products. Azure revenue and compute
usage increased by triple digits in the fourth quarter year over year, and we ended
fiscal year 2015 with more than 17,000 Enterprise Mobility Services customers.
Ľ
We reached over 8 million paid Dynamics seats and refreshed and enhanced
Microsoft Dynamics ERP products. We also introduced new social, productivity,
mobility, customer service, and marketing capabilities in Dynamics CRM.
Ľ
We currently have more than 15 million Office 365 consumer subscribers,
with new customers signing up at a current pace of nearly one million per
month. We also surpassed 150 million downloads of Office mobile to iOS and
Android devices.
Ľ
Bing exceeded 20% U.S. market share as we focused our advertising
business on search. In June 2015, we entered into agreements with AOL and
AppNexus to outsource our display sales efforts.
Ľ
In hardware, we released Surface 3 and expanded distribution of Surface
Pro 3, and the related gross margin percentage grew with increased revenue, and
introduced new categories like HoloLens Đ all with an eye toward generating new
growth in Windows more broadly.
Ľ
Xbox console volumes grew to over 12 million, and Xbox Live users
increased 22%.
Ľ
We shipped over 36 million Lumia units, and announced the restructuring
of our Phone Hardware business to run it more effectively near-term while
driving reinvention longer term.
Ľ
We completed 16 acquisitions, including Mojang Synergies AB (ŇMojangÓ),
the Swedish video game developer of the Minecraft gaming franchise, and others,
to strengthen our cloud platform and invest in mobile applications.
Ľ
We advanced Windows 10 to the threshold of its launch in July 2015 with
the help of the Windows Insider Program, a new paradigm to incorporate unprecedented
levels of user and developer feedback in our development process.
* Annualized
run rate was calculated by multiplying June 2015 revenue by twelve months.
Industry Trends
Our industry is
dynamic and highly competitive, with frequent changes in both technologies and
business models. Each industry shift is an opportunity to conceive new
products, new technologies, or new ideas that can further transform the
industry and our business. At Microsoft, we push the boundaries of what is
possible through a broad range of research and development activities that seek
to identify and address the changing demands of customers, industry trends, and
competitive forces.
Economic Conditions, Challenges, and Risks
The
market for software, devices, and cloud-based services is dynamic and highly
competitive. Our competitors are developing new software and devices, while
also deploying competing cloud-based services for consumers and businesses. The
devices and form factors customers prefer evolve rapidly, and influence how
users access services in the cloud, and in some cases, the userŐs choice of
which suite of cloud-based services to use. We must continue to evolve and
adapt over an extended time in pace with this changing environment. The
investments we are making in devices and infrastructure will increase our
operating costs and may decrease our operating margins.
Our
success is highly dependent on our ability to attract and retain qualified
employees. We hire a mix of university and industry talent worldwide. Microsoft
competes for talented individuals globally by offering an exceptional working
environment, broad customer reach, scale in resources, the ability to grow
oneŐs career across many different products and businesses, and competitive
compensation and benefits. Aggregate demand for our software, services, and
devices is correlated to global macroeconomic and geopolitical factors, which
remain dynamic.
Our
international operations provide a significant portion of our total revenue and
expenses. Many of these revenue and expenses are denominated in currencies
other than the U.S. dollar. As a result, changes in foreign exchange rates may
significantly affect revenue and expenses. Recently, the significant
strengthening of the U.S. dollar relative to certain foreign currencies has
negatively impacted reported revenue and reduced reported expenses from our
international operations.
See
a discussion of these factors and other risks under Risk Factors (Part I,
Item 1A of this Form 10-K).
Seasonality
Our revenue historically has fluctuated quarterly and has generally been
highest in the second quarter of our fiscal year due to corporate calendar
year-end spending trends in our major markets and holiday season spending by
consumers. Our Computing and Gaming Hardware segment is particularly seasonal
as its products are aimed at the consumer market and are in highest demand
during the holiday shopping season. Typically, the Computing and Gaming
Hardware segment has generated approximately 40-50% of its yearly revenue in
our second fiscal quarter.
Unearned Revenue
Quarterly and annual revenue may be impacted by the
deferral of revenue, including:
Ľ Revenue deferred on pre-sales of
Windows to original equipment manufacturers (ŇOEMsÓ) and retailers before
general availability.
Ľ Revenue
deferred on bundled products and services (ŇBundled OfferingsÓ).
Ľ Revenue
deferred on sales of Windows 7 with an option to upgrade to Windows 8 Pro at a
discounted price (the ŇWindows Upgrade OfferÓ).
If
our customers choose to license cloud-based versions of our products and
services rather than licensing transaction-based products and services, the
associated revenue will shift from being recognized at the time of the
transaction to being recognized over the subscription period or upon
consumption, as applicable.
Reportable Segments
The
segment amounts included in MD&A are presented on a basis consistent with
our internal management reporting. Segment information appearing in Note 22 Đ
Segment Information and Geographic Data of the Notes to Financial Statements
(Part II, Item 8 of this Form 10-K) is also presented on this basis. All
differences between our internal management reporting basis and accounting
principles generally accepted in the United States (ŇU.S. GAAPÓ), along with
certain corporate-level and other activity, are included in Corporate and Other.
Operating expenses are not allocated to our segments. We have recast certain
prior period amounts to conform to the current period presentation, with no
impact on consolidated net income or cash flows.
On April 25, 2014, we acquired substantially all of Nokia
CorporationŐs (ŇNokiaÓ) Devices and Services business (ŇNDSÓ). NDS has been
included in our consolidated results of operations since the acquisition date.
We report the financial performance of the acquired business in our Phone
Hardware segment. Prior to the acquisition of NDS, financial results associated
with our joint strategic initiatives with Nokia were reflected in our Devices and
Consumer (ŇD&CÓ) Licensing segment. The contractual relationship with Nokia
related to those initiatives ended in conjunction with the acquisition.
Our reportable segments are described below.
Devices and Consumer
Our D&C segments develop, manufacture, market,
and support products and services designed to entertain and connect people,
increase personal productivity, help people simplify tasks and make more
informed decisions online, and help advertisers connect with audiences. Our
D&C segments are:
Ľ D&C
Licensing, comprising: Windows, including all OEM licensing (ŇWindows OEMÓ)
and other non-volume licensing and academic volume licensing of the Windows
operating system and related software; non-volume licensing of Microsoft
Office, comprising the core Office product set, for consumers (ŇOffice
ConsumerÓ); Windows Phone operating system, including related patent licensing;
and certain other patent licensing revenue.
Ľ Computing and Gaming Hardware,
comprising: Xbox gaming and entertainment consoles and accessories,
second-party and third-party video game royalties, and Xbox Live subscriptions
(ŇXbox PlatformÓ); Surface devices and accessories (ŇSurfaceÓ); and Microsoft
PC accessories.
Ľ Phone
Hardware, comprising: Lumia phones and other non-Lumia phones, beginning
with our acquisition of NDS.
Ľ D&C
Other, comprising: Resale, consisting of transactions in our Windows Store and
Xbox marketplace; search advertising; display advertising; Office 365 Consumer,
comprising Office 365 Home and Office 365 Personal; Studios, comprising
first-party video games; Mojang; non-Microsoft products sold in our retail
stores; and certain other consumer products and services not included in the
categories above.
Commercial
Our Commercial segments develop, market, and
support software and services designed to increase individual, team, and
organizational productivity and efficiency, including simplifying everyday
tasks through seamless operations across the userŐs hardware and software. Our
Commercial segments are:
Ľ Commercial
Licensing, comprising: server products, including Windows Server, Microsoft
SQL Server, Visual Studio, System Center, and related Client Access Licenses
(ŇCALsÓ); Windows Embedded; volume licensing of the Windows operating system,
excluding academic (ŇWindows CommercialÓ); Microsoft Office for business,
including Office, Exchange, SharePoint, Skype for Business, and related CALs
(ŇOffice CommercialÓ); Microsoft Dynamics business solutions, excluding Dynamics
CRM Online; and Skype.
Ľ Commercial
Other, comprising: Enterprise Services, including Premier Support Services
and Microsoft Consulting Services; Commercial Cloud, comprising Office 365
Commercial, other Microsoft Office online offerings, Dynamics CRM Online, and
Microsoft Azure; and certain other commercial products and online services not
included in the categories above.
SUMMARY RESULTS OF OPERATIONS
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except percentages and per share amounts) |
|
2015 |
|
|
2014 |
|
|
2013 |
|
|
Percentage |
|
|
Percentage |
|
|||||
|
|
|
|||||||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||
|
Revenue |
|
$ |
93,580 |
|
|
$ |
86,833 |
|
|
$ |
77,849 |
|
|
|
8% |
|
|
|
12% |
|
|
Gross margin |
|
$ |
60,542 |
|
|
$ |
59,755 |
|
|
$ |
57,464 |
|
|
|
1% |
|
|
|
4% |
|
|
Operating income |
|
$ |
18,161 |
|
|
$ |
27,759 |
|
|
$ |
26,764 |
|
|
|
(35)% |
|
|
|
4% |
|
|
Diluted earnings per share |
|
$ |
1.48 |
|
|
$ |
2.63 |
|
|
$ |
2.58 |
|
|
|
(44)% |
|
|
|
2% |
|
|
|
|
|||||||||||||||||||
Fiscal year 2015 compared with fiscal year
2014
Revenue
increased $6.7 billion or 8%, reflecting a full year of Phone Hardware sales
and growth in revenue from our Commercial Cloud, Surface, server products,
search advertising, and Xbox Live transactions. These increases were offset in
part by a decline in revenue from Office Commercial, Windows OEM, licensing of Windows
Phone operating system, and Office Consumer. Revenue included an unfavorable
foreign currency impact of approximately 2%.
Gross margin increased $787 million or 1%,
primarily due to higher revenue, offset in part by a $6.0 billion or 22%
increase in cost of revenue. Cost of revenue increased, mainly due to Phone
Hardware, as well as increasing costs in support of our Commercial Cloud,
including $396 million of higher datacenter expenses. Gross margin, as a
percentage of revenue, improved year over year in each of our reportable
segments.
Operating income decreased $9.6 billion or 35%, primarily
due to impairment, integration, and restructuring expenses in the current year,
as well as increased research and development expenses, offset in part by higher
gross margin. Key changes in operating expenses were:
Ľ Impairment,
integration, and restructuring expenses were $10.0 billion in the current year,
reflecting goodwill and asset impairment charges of $7.5 billion related to our
Phone Hardware business, and $2.5 billion of integration and restructuring
expenses, driven by costs associated with our restructuring plans.
Ľ Research
and development expenses increased $665 million or 6%, mainly due to increased
investment in new products and services, including NDS expenses, offset in part
by reduced headcount-related expenses.
Diluted
earnings per share (ŇEPSÓ) were negatively impacted by impairment, integration,
and restructuring expenses, which decreased diluted EPS by $1.15.
Fiscal year 2014 compared with fiscal year
2013
Revenue
increased $9.0 billion or 12%, demonstrating growth across our consumer and
commercial businesses, primarily due to higher revenue from server products,
Xbox Platform, Commercial Cloud, and Surface. Revenue also increased due to the
acquisition of NDS. Commercial Cloud revenue doubled, reflecting continued
subscriber growth from our cloud-based offerings.
Gross
margin increased $2.3 billion or 4%, primarily due to higher revenue, offset in
part by a $6.7 billion or 33% increase in cost of revenue. Cost of revenue
increased mainly due to higher volumes of Xbox consoles and Surface devices
sold, and $575 million of higher datacenter expenses, primarily in support of
Commercial Cloud revenue growth. Cost of revenue also increased due to the
acquisition of NDS.
Operating income increased $995 million or 4%,
reflecting higher gross margin, offset in part by increased research and
development expenses and sales and marketing expenses. Key changes in operating
expenses were:
Ľ Research
and development expenses increased $970 million or 9%, mainly due to increased
investment in new products and services in our Devices engineering group,
including NDS expenses, and increased investment in our Applications and
Services engineering group.
Ľ Sales
and marketing expenses increased $535 million or 4%, primarily due to NDS
expenses and increased investment in sales resources, offset in part by lower
advertising costs.
SEGMENT RESULTS OF OPERATIONS
Devices and Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
millions, except percentages) |
|
2015 |
|
|
2014 |
|
|
2013 |
|
|
Percentage |
|
|
Percentage |
|
|||||
|
|
|
|||||||||||||||||||
|
|
|
|
|
|
||||||||||||||||
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|||||||||||||||
|
Licensing |
|
$ |
14,969 |
|
|
$ |
19,528 |
|
|
$ |
19,427 |
|
|
|
(23)% |
|
|
|
1% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hardware: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Computing and Gaming Hardware |
|
|
10,183 |
|
|
|
9,093 |
|
|
|
6,149 |
|
|
|
12% |
|
|
|
48% |
|
|
Phone Hardware |
|
|
7,524 |
|
|
|
1,982 |
|
|
|
0 |
|
|
|
* |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Devices and Consumer Hardware |
|
|
17,707 |
|
|
|
11,075 |
|
|
|
6,149 |
|
|
|
60% |
|
|
|
80% |
|
|
Other |
|
|
8,825 |
|
|
|
7,014 |
|
|
|
6,431 |
|
|
|
26% |
|
|
|
9% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total Devices and
Consumer revenue |
|
$ |
41,501 |
|
|
$ |
37,617 |
|
|
$ |
32,007 |
|
|
|
10% |
|
|
|
18% |
|
|
|
|
|
|
|
||||||||||||||||
|
Gross Margin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|||||||||||||||
|
Licensing |
|
$ |
13,870 |
|
|
$ |
17,439 |
|
|
$ |
16,985 |
|
|
|
(20)% |
|
|
|
3% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hardware: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Computing and Gaming Hardware |
|
|
1,788 |
|
|
|
892 |
|
|
|
956 |
|
|
|
100% |
|
|
|
(7)% |
|
|
Phone Hardware |
|
|
701 |
|
|
|
54 |
|
|
|
0 |
|
|
|
* |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Devices and Consumer Hardware |
|
|
2,489 |
|
|
|
946 |
|
|
|
956 |
|
|
|
163% |
|
|
|
(1)% |
|
|
Other |
|
|
2,022 |
|
|
|
1,393 |
|
|
|
1,951 |
|
|
|
45% |
|
|
|
(29)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total Devices and
Consumer gross margin |
|
$ |
18,381 |
|
|
$ |
19,778 |
|
|
$ |
19,892 |
|
|
|
(7)% |
|
|
|
(1)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Not
meaningful
Fiscal year 2015 compared with fiscal year 2014
D&C
revenue increased $3.9 billion or 10%, primarily due to a full year of Phone
Hardware sales, as well as higher revenue from Surface, search advertising, and
Xbox Live transactions, offset in part by a decrease in revenue from Windows
OEM, licensing of Windows Phone operating system, and Office Consumer.
Collectively, Office Consumer and Office 365 Consumer revenue declined 17%.
D&C gross margin decreased $1.4 billion or 7%, reflecting higher cost of
revenue, offset in part by higher revenue. D&C cost of revenue increased $5.3
billion or 30%, mainly due to a full year of Phone Hardware costs.
D&C Licensing
D&C
Licensing revenue decreased $4.6 billion or 23%, mainly due to lower revenue
from Windows OEM, Windows Phone licensing, and Office Consumer. Windows OEM
revenue declined $1.9 billion or 15%, primarily due to declines of 15% in OEM
Pro revenue and 16% in OEM non-Pro revenue. Windows OEM Pro revenue decreased,
primarily due to benefits realized from the expiration of support for Windows
XP in the prior year, and declines in the business PC market. Windows OEM
non-Pro revenue declined, mainly due to an increased mix of opening price point
devices sold, and declines in the consumer PC market. Revenue from licensing of
Windows Phone operating system decreased $1.4 billion or 55%, primarily due to prior
year revenue associated with our joint strategic initiatives with Nokia that
terminated when we acquired NDS. Office Consumer revenue declined $946 million
or 29%, reflecting the transition of customers to Office 365 Consumer, where
revenue is recognized ratably, and declines in the Japan PC market, where
Office is predominantly pre-installed on new PCs.
D&C
Licensing gross margin decreased $3.6 billion or 20%, primarily due to the
decline in revenue, offset in part by a $990 million or 47% decrease in cost of
revenue. D&C Licensing cost of revenue decreased, mainly due to a $788 million
decline in traffic acquisition costs, driven by prior year costs associated
with our joint strategic initiatives with Nokia that terminated when we
acquired NDS.
Computing and Gaming Hardware
Computing
and Gaming Hardware revenue increased $1.1 billion or 12%, primarily due to
higher revenue from Surface, offset in part by lower revenue from Xbox
Platform. Surface revenue increased 65% to $3.6 billion, primarily due to
Surface Pro 3 units sold. Surface Pro 3 was released in June 2014. Xbox
Platform revenue decreased $385 million or 6%, driven by lower prices of Xbox
One consoles compared to the prior year, as well as a decrease in second- and
third-party video games revenue. We sold 12.1 million Xbox consoles in fiscal
year 2015 compared with 11.7 million consoles in fiscal year 2014.
Computing
and Gaming Hardware gross margin increased $896 million or 100%, mainly due to
higher revenue, offset in part by a $194 million or 2% increase in cost of
revenue. Gross margin expansion was driven by Surface, which benefited from the
mix shift to Surface Pro 3. Xbox Platform cost of revenue was comparable to the
prior year.
Phone Hardware
Phone
Hardware revenue increased $5.5 billion, as we sold 36.8 million Lumia
phones and 126.8 million other non-Lumia phones in fiscal year 2015,
compared with 5.8 million and 30.3 million sold, respectively, in fiscal year 2014
following the acquisition of NDS. We acquired NDS in the fourth quarter of
fiscal year 2014.
Phone
Hardware gross margin increased $647 million, primarily due to higher revenue,
offset in part by higher cost of revenue. Phone Hardware cost of revenue
increased $4.9 billion, and included $476 million of amortization of acquired
intangible assets in fiscal year 2015.
We
recorded goodwill and asset impairment charges of $7.5 billion related to our
Phone Hardware business in the fourth quarter of fiscal year 2015. See further discussion
under Impairment, Integration, and Restructuring Expenses below.
D&C Other
D&C
Other revenue increased $1.8 billion or 26%, mainly due to higher revenue from
search advertising, Xbox Live, first-party video games, including Minecraft,
and Office 365 Consumer. D&C Other revenue included an unfavorable foreign
currency impact of approximately 2%. Search advertising revenue increased $651
million or 22%, primarily driven by growth in Bing, due to higher revenue per
search and search volume. Xbox Live and other store transaction revenue
increased $531 million, driven by increased Xbox Live users and revenue per
user. First-party video games revenue increased $367 million, mainly due to
sales of Minecraft following the acquisition of Mojang in November 2014, and
new Xbox titles released in the current year. Office 365 Consumer revenue
increased $323 million, reflecting subscriber growth.
D&C
Other gross margin increased $629 million or 45%, due to higher revenue, offset
in part by a $1.2 billion or 21% increase in cost of revenue. D&C Other
cost of revenue grew, mainly due to $372 million higher Xbox Live and other
store transaction costs, a $279 million increase in search infrastructure
costs, $267 million higher retail stores expenses, and $194 million higher
first-party video games and Minecraft costs.
Fiscal year 2014 compared with fiscal year
2013
D&C
revenue increased $5.6 billion or 18%, primarily due to higher revenue from
Xbox Platform, Surface, and Windows Phone. Revenue also increased $2.0 billion
due to the acquisition of NDS. D&C gross margin decreased slightly,
reflecting higher cost of revenue, offset in part by higher revenue. Cost of
revenue increased $5.7 billion or 47%, mainly due to Xbox Platform and Surface.
Cost of revenue also increased $1.9 billion due to NDS.
D&C Licensing
D&C
Licensing revenue increased $101 million or 1%, mainly due to increased Windows
Phone revenue, offset in part by lower revenue from licenses of Windows and
Office Consumer. Windows Phone revenue increased $822 million or 48%, mainly
due to the recognition of $382 million revenue under our joint strategic
initiatives with Nokia, which concluded in conjunction with the acquisition of
NDS, as well as an increase in phone patent licensing revenue. Retail and
non-OEM sales of Windows declined $274 million or 35%, mainly due to the launch
of Windows 8 in the prior year. Windows OEM revenue declined $136 million or
1%, due to continued softness in the consumer PC market, offset in part by a
12% increase in OEM Pro revenue. Office Consumer revenue declined $249 million or
7%, reflecting the transition of customers to Office 365 Consumer as well as
continued softness in the consumer PC market. The declines in Windows OEM and
Office Consumer revenue were partially offset by benefits realized from ending
our support for Windows XP in April 2014.
D&C
Licensing gross margin increased $454 million or 3%, primarily due to a $353 million
or 14% decrease in cost of revenue. D&C Licensing cost of revenue
decreased, mainly due to a $411 million or 23% decline in traffic acquisition costs.
Computing and Gaming
Hardware
Computing
and Gaming Hardware revenue increased $2.9 billion or 48%, primarily due to
higher revenue from the Xbox Platform and Surface. Xbox Platform revenue
increased $1.7 billion or 34%, mainly due to sales of Xbox One, which was
released in November 2013, offset in part by a decrease in sales of Xbox 360.
We sold 11.7 million Xbox consoles during fiscal year 2014 compared with
9.8 million Xbox consoles during fiscal year 2013. Surface revenue increased
$1.3 billion or 157%, mainly due to a higher number of devices and accessories
sold.
Computing
and Gaming Hardware gross margin decreased slightly, due to a $3.0 billion or 58%
increase in cost of revenue, offset in part by higher revenue. Xbox Platform
cost of revenue increased $2.1 billion or 72%, mainly due to higher volumes of
consoles sold and higher costs associated with Xbox One. Surface cost of
revenue increased $970 million or 51%, mainly due to a higher number of devices
and accessories sold, offset in part by a charge for Surface RT inventory
adjustments of approximately $900 million in fiscal year 2013.
Phone Hardware
Phone Hardware revenue was $2.0 billion in fiscal year 2014, reflecting
sales of Lumia phones and other non-Lumia phones following the acquisition of
NDS on April 25, 2014. Since the acquisition, we sold 5.8 million
Lumia phones and 30.3 million other non-Lumia phones in fiscal year 2014.
Phone Hardware gross margin was $54 million in fiscal year 2014,
reflecting revenue of $2.0 billion, offset in part by $1.9 billion cost of
revenue, including amortization of acquired intangible assets and the impact of
decisions to rationalize our device portfolio.
D&C Other
D&C
Other revenue increased $583 million or 9%, mainly due to higher online
advertising revenue and Office 365 Consumer revenue, offset in part by a $213
million decrease in first-party video games revenue, primarily due to the
release of Halo 4 in the second quarter of fiscal year 2013. Online
advertising revenue increased $497 million or 14%. Search advertising
revenue increased 39%, primarily due to increased revenue per search resulting
from ongoing improvements in advertising products, higher search volume, and
the expiration of North American revenue per search guarantee payments to Yahoo! in the prior year, offset in part by a 25%
reduction in display advertising revenue. Office 365 Consumer revenue grew $316
million, primarily reflecting subscriber growth. We ended fiscal year 2014 with
over five million subscribers.
D&C
Other gross margin decreased $558 million or 29%, due to a $1.1 billion or 25%
increase in cost of revenue, offset in part by higher revenue. D&C Other
cost of revenue grew, mainly due to a $541 million or 24% increase in online
advertising cost of revenue, reflecting support of online infrastructure. Cost
of revenue also increased $219 million or 15%, due to higher resale
transactions costs.
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except
percentages) |
|
2015 |
|
|
2014 |
|
|
2013 |
|
|
Percentage |
|
|
Percentage |
|
||||||
|
|
|
||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
||||||||||||||||
|
Licensing |
|
$ |
41,039 |
|
|
$ |
42,085 |
|
|
$ |
39,778 |
|
|
|
(2)% |
|
|
|
6% |
|
|
|
Other |
|
|
10,836 |
|
|
|
7,546 |
|
|
|
5,661 |
|
|
|
44% |
|
|
|
33% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Total Commercial revenue |
|
$ |
51,875 |
|
|
$ |
49,631 |
|
|
$ |
45,439 |
|
|
|
5% |
|
|
|
9% |
|
|
|
|
|
|
|
|
|||||||||||||||||
|
Gross Margin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
||||||||||||||||
|
Licensing |
|
$ |
37,830 |
|
|
$ |
38,615 |
|
|
$ |
36,280 |
|
|
|
(2)% |
|
|
|
6% |
|
|
|
Other |
|
|
4,199 |
|
|
|
1,855 |
|
|
|
922 |
|
|
|
126% |
|
|
|
101% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Total Commercial gross margin |
|
$ |
42,029 |
|
|
$ |
40,470 |
|
|
$ |
37,202 |
|
|
|
4% |
|
|
|
9% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year 2015 compared with fiscal year
2014
Commercial
revenue increased $2.2 billion or 5%, mainly due to growth in revenue from our
Commercial Cloud and server products, offset in part by a decline in Office
Commercial. Commercial revenue included an unfavorable foreign currency impact
of approximately 2%. Our server products and services grew 9%. Our Office
Commercial products and services declined 1%. Commercial gross margin increased
$1.6 billion or 4%.
Commercial Licensing
Commercial
Licensing revenue decreased $1.0 billion or 2%, primarily due to a decline in
revenue from Office Commercial, offset in part by increased revenue from our
server products. Commercial Licensing revenue included an unfavorable
foreign currency impact of approximately 2%. Office Commercial revenue declined
$2.5 billion or 13%, due to lower transactional license volume, reflecting a
decline in the business PC market following Windows XP end of support in the
prior year, customers transitioning to Office 365 Commercial, and declines in
Japan. Our server products revenue grew $1.1 billion or 7%, primarily driven by
higher premium mix of Microsoft SQL Server, Windows Server, and System Center.
Commercial
Licensing gross margin decreased $785 million or 2%, in line with revenue.
Commercial Other
Commercial
Other revenue increased $3.3 billion or 44%, primarily due to higher Commercial
Cloud revenue. Commercial Other revenue included an unfavorable foreign
currency impact of approximately 3%. Commercial Cloud revenue grew $3.0 billion
or 106%, mainly due to subscriber growth and higher premium mix of Office 365
Commercial, as well as continued revenue growth from Microsoft Azure.
Commercial Other gross margin increased $2.3
billion or 126%, due to higher revenue, offset in part by a $946 million or 17%
increase in cost of revenue. The increase in Commercial Other cost of revenue
was mainly due to higher datacenter and other online infrastructure expenses,
reflecting increased datacenter capacity to serve our growing Commercial Cloud.
Fiscal year 2014 compared with fiscal year
2013
Commercial
revenue increased $4.2 billion or 9%, mainly due to growth in revenue from our
on-premises licensing businesses and Commercial Cloud. Collectively, Office
Commercial and Office 365 Commercial revenue grew 7%. Collectively, our server
products revenue, including Microsoft Azure, grew 13%. Commercial gross margin
increased $3.3 billion or 9%, in line with revenue.
Commercial Licensing
Commercial Licensing revenue increased $2.3 billion
or 6%, primarily due to increased revenue from our server products, as well as
higher revenue from Windows Commercial and Office Commercial. Our server
products revenue grew $1.7 billion or 11%, driven primarily by increased sales
of Microsoft SQL Server. Windows Commercial revenue grew $334 million or 10%,
mainly due to increased renewal rates and transactional purchases driven by
Windows XP end of support. Office Commercial revenue grew $219 million or 1%,
and was impacted by customers transitioning to Office 365 Commercial.
Commercial
Licensing gross margin increased $2.3 billion or 6%, in line with revenue
growth.
Commercial Other
Commercial
Other revenue increased $1.9 billion or 33%, due to higher Commercial Cloud
revenue and Enterprise Services revenue. Commercial Cloud revenue grew $1.5
billion or 116%, mainly due to higher revenue from Office 365 Commercial.
Enterprise Services revenue grew $380 million or 9%, mainly due to growth in
Premier Support Services.
Commercial Other gross margin increased $933 million
or 101%, due to higher revenue, offset in part by a $952 million or 20%
increase in cost of revenue. The increase in cost of revenue was mainly due to
higher datacenter expenses, reflecting support of our growing Commercial Cloud.
Corporate and Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except percentages) |
|
2015 |
|
|
2014 |
|
|
2013 |
|
|
Percentage |
|
|
Percentage |
|
|||||
|
|
|
|||||||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||
|
Revenue |
|
$ |
204 |
|
|
$ |
(415 |
) |
|
$ |
403 |
|
|
|
149% |
|
|
|
(203)% |
|
|
Gross margin |
|
$ |
132 |
|
|
$ |
(493 |
) |
|
$ |
370 |
|
|
|
127% |
|
|
|
(233)% |
|
|
|
|
|||||||||||||||||||
Corporate
and Other revenue comprises certain revenue deferrals, including those related
to product and service upgrade offers and pre-sales of new products to OEMs
prior to general availability.
Fiscal year 2015 compared with fiscal year
2014
Corporate
and Other revenue increased $619 million, primarily due to the timing of
revenue deferrals compared to the prior year. During fiscal year 2015, we
recognized a net $303 million of previously deferred revenue related to Bundled
Offerings. During fiscal year 2014, we deferred a net $349 million of revenue
related to Bundled Offerings.
Corporate
and Other gross margin increased $625 million, primarily due to increased
revenue.
Fiscal year 2014 compared with fiscal year
2013
Corporate
and Other revenue decreased $818 million, primarily due to the timing of
revenue deferrals. During fiscal year 2014, we deferred a net $349 million of
revenue related to Bundled Offerings. During fiscal year 2013, we recognized
$540 million of previously deferred revenue related to the Windows Upgrade
Offer. The revenue was recognized upon expiration of the offer.
Corporate
and Other gross margin decreased $863 million, mainly due to decreased revenue.
OPERATING EXPENSES
Research and Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except percentages) |
|
2015 |
|
|
2014 |
|
|
2013 |
|
|
Percentage |
|
|
Percentage |
|
|||||
|
|
|
|||||||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||
|
Research and development |
|
$ |
12,046 |
|
|
$ |
11,381 |
|
|
$ |
10,411 |
|
|
|
6% |
|
|
|
9% |
|
|
As a percent of revenue |
|
|
13% |
|
|
|
13% |
|
|
|
13% |
|
|
|
0ppt |
|
|
|
0ppt |
|
|
|
|
|||||||||||||||||||
Research
and development expenses include payroll, employee benefits, stock-based
compensation expense, and other headcount-related expenses associated with
product development. Research and development expenses also include third-party
development and programming costs, localization costs incurred to translate
software for international markets, and the amortization of purchased software
code.
Fiscal year 2015 compared with fiscal year
2014
Research
and development expenses increased $665 million or 6%, mainly due to increased
investment in new products and services, including $739 million higher NDS
expenses, offset in part by reduced headcount-related expenses.
Fiscal year 2014 compared with fiscal year
2013
Research
and development expenses increased $970 million or 9%, mainly due to increased
investment in new products and services in our Devices engineering group,
including $275 million of NDS expenses, and increased investment in our
Applications and Services engineering group.
Sales and Marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except percentages) |
|
2015 |
|
|
2014 |
|
|
2013 |
|
|
Percentage |
|
|
Percentage |
|
|||||
|
|
|
|||||||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||
|
Sales and marketing |
|
$ |
15,713 |
|
|
$ |
15,811 |
|
|
$ |
15,276 |
|
|
|
(1)% |
|
|
|
4% |
|
|
As a percent of revenue |
|
|
17% |
|
|
|
18% |
|
|
|
20% |
|
|
|
(1)ppt |
|
|
|
(2)ppt |
|
|
|
|
|||||||||||||||||||
Sales
and marketing expenses include payroll, employee benefits, stock-based
compensation expense, and other headcount-related expenses associated with
sales and marketing personnel and the costs of advertising, promotions, trade
shows, seminars, and other programs.
Fiscal year 2015 compared with fiscal year
2014
Sales
and marketing expenses decreased $98 million or 1%, primarily due to a decline
in advertising and marketing programs costs and a reduction in
headcount-related expenses, offset in part by an increase in NDS expenses. Sales
and marketing expenses included a favorable foreign currency impact of
approximately 4%.
Fiscal year 2014 compared with fiscal year
2013
Sales and marketing expenses increased $535 million
or 4%, primarily due to NDS expenses and increased investment in sales
resources, offset in part by lower advertising costs. NDS sales and marketing
expenses were $394 million during fiscal year 2014. Average headcount,
excluding NDS, grew 4%. Advertising costs, excluding NDS, declined $403 million
or 15%, primarily due to Windows 8 and Surface costs in the prior year.
General and Administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
millions, except percentages) |
|
2015 |
|
|
2014 |
|
|
2013 |
|
|
Percentage |
|
|
Percentage |
|
|||||
|
|
|
|||||||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||
|
General and administrative |
|
$ |
4,611 |
|
|
$ |
4,677 |
|
|
$ |
5,013 |
|
|
|
(1)% |
|
|
|
(7)% |
|
|
As a percent of revenue |
|
|
5% |
|
|
|
5% |
|
|
|
6% |
|
|
|
0ppt |
|
|
|
(1)ppt |
|
|
|
|
|||||||||||||||||||
General
and administrative expenses include payroll, employee benefits, stock-based
compensation expense, severance expense, and other headcount-related expenses
associated with finance, legal, facilities, certain human resources and other
administrative personnel, certain taxes, and legal and other administrative
fees.
Fiscal year 2015 compared with fiscal year 2014
General
and administrative expenses were comparable to the prior year.
Fiscal year 2014 compared with fiscal year 2013
General
and administrative expenses decreased $336 million or 7%, mainly due to the European
Commission fine in the prior year, offset in part by higher business taxes,
higher costs for internal use software capitalized in the prior year, and NDS
expenses. NDS general and administrative expenses were $77 million during
fiscal year 2014.
IMPAIRMENT, INTEGRATION, AND RESTRUCTURING EXPENSES
Impairment, integration, and restructuring expenses include costs
associated with the impairment of goodwill and intangible assets related to our
Phone Hardware business, employee severance expenses and costs associated with
the consolidation of facilities and manufacturing operations related to
restructuring activities, and systems consolidation and other business
integration expenses associated with our acquisition of NDS.
Fiscal year 2015 compared
with fiscal year 2014
Impairment,
integration, and restructuring expenses were $10.0 billion for fiscal year 2015,
compared to $127 million for fiscal year 2014. The increase was mainly due to
impairment charges of $7.5 billion related to our Phone Hardware business in
the fourth quarter of fiscal year 2015. Our annual goodwill impairment test as of May 1, 2015
indicated that the carrying value of Phone Hardware goodwill exceeded its
estimated fair value. Accordingly, we recorded a goodwill impairment charge of
$5.1 billion, reducing Phone Hardware goodwill from $5.4 billion to $116
million, net of foreign currency remeasurements, as well as an impairment charge of
$2.2 billion related to the write-down of Phone Hardware intangible assets.
Restructuring charges were $2.1 billion, including employee severance expenses
and the write-down of certain assets in connection with our restructuring
activities. Integration expenses increased $308 million, due to a full-year of
integration activities in fiscal year 2015 associated with the acquisition of
NDS.
Fiscal year 2014 compared with fiscal year 2013
Impairment, integration, and restructuring expenses were $127
million for fiscal year 2014, reflecting integration expenses associated with
the acquisition of NDS. No impairment, integration, and restructuring expenses
were recorded in fiscal year 2013.
OTHER INCOME (EXPENSE), NET
The
components of other income (expense), net were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
|||
|
|
|
|||||||||||
|
|
|
|
|
|||||||||
|
Year Ended June 30, |
|
|
2015 |
|
|
|
2014 |
|
|
|
2013 |
|
|
|
|
|
|
|||||||||
|
Dividends and interest income |
|
$ |
766 |
|
|
$ |
883 |
|
|
$ |
677 |
|
|
Interest expense |
|
|
(781 |
) |
|
|
(597 |
) |
|
|
(429 |
) |
|
Net recognized gains on investments |
|
|
716 |
|
|
|
437 |
|
|
|
116 |
|
|
Net losses on derivatives |
|
|
(423 |
) |
|
|
(328 |
) |
|
|
(196 |
) |
|
Net gains (losses) on foreign currency remeasurements |
|
|
335 |
|
|
|
(165 |
) |
|
|
(74 |
) |
|
Other |
|
|
(267 |
) |
|
|
(169 |
) |
|
|
194 |
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total |
|
$ |
346 |
|
|
$ |
61 |
|
|
$ |
288 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We
use derivative instruments to: manage risks related to foreign currencies,
equity prices, interest rates, and credit; enhance investment returns; and
facilitate portfolio diversification. Gains and losses from changes in fair
values of derivatives that are not designated as hedges are primarily
recognized in other income (expense), net. Other than those derivatives entered
into for investment purposes, such as commodity contracts, the gains (losses)
are generally economically offset by unrealized gains (losses) in the
underlying available-for-sale securities and gains (losses) on certain balance
sheet amounts from foreign exchange rate changes.
Fiscal year 2015 compared with fiscal year
2014
Dividends
and interest income decreased due to lower yields on fixed income securities,
offset in part by higher portfolio balances. Interest expense increased due to
higher outstanding long-term debt. Net recognized gains on investments
increased primarily due to higher gains on sales of equity securities, offset
in part by higher other-than-temporary impairments. Other-than-temporary
impairments were $183 million in fiscal year 2015, compared with $106 million
in fiscal year 2014. Net losses on derivatives increased due to losses on
commodity contracts in the current period as compared to gains in the prior
period, offset in part by lower losses on currency and equity contracts. For
fiscal year 2015, other reflects recognized losses from certain joint ventures
and divestitures.
Fiscal year 2014 compared with fiscal year
2013
Dividends and interest income increased due to
higher portfolio balances. Interest expense increased due to higher outstanding
long-term debt. Net recognized gains on investments increased primarily due to
higher gains on sales of equity securities and lower other-than-temporary
impairments. Other-than-temporary impairments were $106 million in fiscal year
2014, compared with $208 million in fiscal year 2013. Net losses on derivatives
increased due to higher losses on foreign exchange contracts, losses on equity
derivatives as compared to gains in the prior period, offset in part by gains
on commodity and interest rate derivatives as compared to losses in the prior
period. For fiscal year 2014, other reflects recognized losses from certain
joint ventures, offset in part by a recognized gain on a divestiture. For
fiscal year 2013, other reflects recognized gains on divestitures, including
the gain recognized upon the divestiture of our 50% share in the MSNBC joint
venture.
INCOME TAXES
Fiscal year 2015 compared with fiscal year 2014
Our
effective tax rate for fiscal years 2015 and 2014 was approximately 34% and
21%, respectively. The fiscal year 2015 effective rate increased by 13%,
primarily due to goodwill and asset impairments and restructuring charges recorded
in fiscal year 2015, most of which did not generate a tax benefit. Our
effective tax rate was lower than the U.S. federal statutory rate primarily due
to foreign earnings taxed at lower rates resulting from producing and
distributing our products and services through our foreign regional operations
centers in Ireland, Singapore, and Puerto Rico. In fiscal year 2015, this reduction
was mostly offset by losses in foreign jurisdictions for which we may not
realize a tax benefit, primarily as a result of impairment and restructuring
charges.
Changes
in the mix of income before income taxes between the U.S. and foreign countries
also impacted our effective tax rates and resulted primarily from changes in
the geographic distribution of and changes in consumer demand for our products
and services. We supply our Windows PC operating system to customers through
our U.S. regional operating center, while we supply the Microsoft Office system
and our server products and tools to customers through our foreign regional
operations centers. In fiscal years 2015 and 2014, our U.S. income before
income taxes was $7.4 billion and $7.1 billion, respectively, and comprised 40%
and 26%, respectively, of our income before income taxes. In fiscal years 2015
and 2014, our foreign income before income taxes was $11.1 billion and $20.7
billion, respectively, and comprised 60% and 74%, respectively, of our income
before income taxes.
Tax contingencies and other income tax liabilities
were $12.1 billion and $10.4 billion as of June 30, 2015 and 2014,
respectively, and are included in other long-term liabilities. This increase relates primarily to adjustments to
prior yearsŐ liabilities for intercompany transfer pricing and adjustments
related to our IRS audits. While we settled a portion of the I.R.S. audit for tax years 2004 to
2006 during the third quarter of fiscal year 2011, we remain under audit for
those years. In February 2012, the I.R.S. withdrew its 2011 Revenue Agents
Report and reopened the audit phase of the examination. As of June 30, 2015,
the primary unresolved issue relates to transfer pricing, which could have a
significant impact on our consolidated financial statements if not resolved
favorably. We believe our allowances for income tax contingencies are adequate.
We have not received a proposed assessment for the unresolved issues and do not
expect a final resolution of these issues in the next 12 months. Based on
the information currently available, we do not anticipate a significant
increase or decrease to our tax contingencies for these issues within the next
12 months. We also continue to be subject to examination by the I.R.S. for tax
years 2007 to 2015.
We
are subject to income tax in many jurisdictions outside the U.S. Our operations
in certain jurisdictions remain subject to examination for tax years 1996 to 2015,
some of which are currently under audit by local tax authorities. The
resolutions of these audits are not expected to be material to our consolidated
financial statements.
Fiscal year 2014 compared with fiscal year
2013
Our
effective tax rate for fiscal years 2014 and 2013 was approximately 21% and
19%, respectively. Our effective tax rate was lower than the U.S. federal
statutory rate primarily due to earnings taxed at lower rates in foreign
jurisdictions resulting from producing and distributing our products and
services through our foreign regional operations centers in Ireland, Singapore,
and Puerto Rico.
Our fiscal year 2014 effective rate increased by 2% from fiscal year 2013 mainly due to adjustments of $458 million to prior yearsŐ liabilities for intercompany transfer pricing that increased taxable income in more highly taxed jurisdictions, as well as losses incurred by NDS and changes in the geographic mix of our business. This was offset in part by favorable transfer pricing developments in certain foreign tax jurisdictions, primarily Denmark.
Changes
in the mix of income before income taxes between the U.S. and foreign countries
also impacted our effective tax rates and resulted primarily from changes in
the geographic distribution of and changes in consumer demand for our products
and services. We supply our Windows PC operating system to customers through
our U.S. regional operating center, while we supply the Microsoft Office system
and our server products and tools to customers through our foreign regional
operations centers. Windows PC operating system revenue decreased $655 million
in fiscal year 2014, while Microsoft Office system and server products and
tools revenue increased $1.3 billion and $1.6 billion, respectively, during
this same period. In fiscal years 2014 and 2013, our U.S. income before income
taxes was $7.1 billion and $6.7 billion, respectively, and comprised 26% and
25%, respectively, of our income before income taxes. In fiscal years 2014 and
2013, the foreign income before income taxes was $20.7 billion and $20.4
billion, respectively, and comprised 74% and 75%, respectively, of our income
before income taxes.
FINANCIAL CONDITION
Cash, Cash Equivalents, and Investments
Cash,
cash equivalents, and short-term investments totaled $96.5 billion as of June
30, 2015, compared with $85.7 billion as of June 30, 2014. Equity and
other investments were $12.1 billion as of June 30, 2015, compared with $14.6
billion as of June 30, 2014. Our short-term investments are primarily to
facilitate liquidity and for capital preservation. They consist predominantly
of highly liquid investment-grade fixed-income securities, diversified among
industries and individual issuers. The investments are predominantly U.S.
dollar-denominated securities, but also include foreign currency-denominated
securities in order to diversify risk. Our fixed-income investments are exposed
to interest rate risk and credit risk. The credit risk and average maturity of
our fixed-income portfolio are managed to achieve economic returns that
correlate to certain fixed-income indices. The settlement risk related to these
investments is insignificant given that the short-term investments held are
primarily highly liquid investment-grade fixed-income securities.
Of
the cash, cash equivalents, and short-term investments at June 30, 2015, $94.4
billion was held by our foreign subsidiaries and would be subject to material
repatriation tax effects. The amount of cash, cash equivalents, and short-term
investments held by foreign subsidiaries subject to other restrictions on the
free flow of funds (primarily currency and other local regulatory) was $2.1
billion. As of June 30, 2015, approximately 79% of the cash equivalents and
short-term investments held by our foreign subsidiaries were invested in U.S.
government and agency securities, approximately 5% were invested in corporate
notes and bonds of U.S. companies, and approximately 5% were invested in U.S.
mortgage- and asset-backed securities, all of which are denominated in U.S.
dollars.
Securities lending
We
lend certain fixed-income and equity securities to increase investment returns.
The loaned securities continue to be carried as investments on our balance
sheet. Cash and/or security interests are received as collateral for the loaned
securities with the amount determined based upon the underlying security lent
and the creditworthiness of the borrower. Cash received is recorded as an asset
with a corresponding liability. Our securities lending payable balance was $92 million
as of June 30, 2015. Our average and maximum securities lending payable
balances for the fiscal year were $287 million and $750 million, respectively.
Intra-year variances in the amount of securities loaned are mainly due to
fluctuations in the demand for the securities.
Valuation
In
general, and where applicable, we use quoted prices in active markets for
identical assets or liabilities to determine the fair value of our financial
instruments. This pricing methodology applies to our Level 1 investments, such
as exchange-traded mutual funds, domestic and international equities, and U.S.
government securities. If quoted prices in active markets for identical assets
or liabilities are not available to determine fair value, then we use quoted
prices for similar assets and liabilities or inputs other than the quoted
prices that are observable either directly or indirectly. This pricing
methodology applies to our Level 2 investments such as corporate notes and
bonds, common and preferred stock, foreign government bonds, mortgage- and
asset-backed securities, U.S. government and agency securities, and
certificates of deposit. Level 3 investments are valued using internally
developed models with unobservable inputs. Assets and liabilities measured at
fair value on a recurring basis using unobservable inputs are an immaterial
portion of our portfolio.
A
majority of our investments are priced by pricing vendors and are generally
Level 1 or Level 2 investments as these vendors either provide a quoted market
price in an active market or use observable inputs for their pricing without
applying significant adjustments. Broker pricing is used mainly when a quoted
price is not available, the investment is not priced by our pricing vendors, or
when a broker price is more reflective of fair values in the market in which
the investment trades. Our broker-priced investments are generally classified
as Level 2 investments because the broker prices these investments based on
similar assets without applying significant adjustments. In addition, all of
our broker-priced investments have a sufficient level of trading volume to
demonstrate that the fair values used are appropriate for these investments.
Our fair value processes include controls that are designed to ensure
appropriate fair values are recorded. These controls include model validation,
review of key model inputs, analysis of period-over-period fluctuations, and
independent recalculation of prices where appropriate.
Cash Flows
Fiscal year 2015 compared with fiscal year 2014
Cash
flows from operations decreased $3.2 billion during the fiscal year to $29.1
billion, mainly due to an increase in materials and production costs in support
of sales growth as well as payments related to restructuring charges and other
changes in working capital, offset in part by increases in cash received from
customers. Cash used in financing increased $686 million to $9.1 billion,
mainly due to a $7.1 billion increase in cash used for common stock
repurchases, offset in part by a $6.7 billion increase in proceeds from
issuances of debt, net of repayments. Cash used in investing increased $4.2
billion to $23.0 billion, mainly due to a $5.5 billion increase in cash used
for net investment purchases, sales, and maturities, partially offset by a $2.2
billion decrease in cash used for acquisitions of companies and purchases of
intangible and other assets.
Fiscal year 2014 compared
with fiscal year 2013
Cash
flows from operations increased $3.4 billion during fiscal year 2014 to $32.2
billion, mainly due to increases in cash received from customers. Cash used in
financing increased $246 million to $8.4 billion, mainly due to a $2.0 billion
increase in cash used for common stock repurchases, a $1.4 billion increase in
dividends paid, and a $324 million decrease in proceeds from the issuance of
common stock, offset in part by a $3.4 billion increase in proceeds from
issuances of debt, net of repayments. Cash used in investing decreased $5.0
billion to $18.8 billion, mainly due to a $10.5 billion decrease in cash used
for net investment purchases, sales, and maturities, offset in part by a $4.4
billion increase in cash used for acquisition of companies and purchases of
intangible and other assets, and a $1.2 billion increase in capital
expenditures for property and equipment.
Debt
We
issued debt to take advantage of favorable pricing and liquidity in the debt
markets, reflecting our credit rating and the low interest rate environment.
The proceeds of these issuances were or will be used for general corporate purposes,
which may include, among other things, funding for working capital, capital
expenditures, repurchases of capital stock, acquisitions, and repayment of
existing debt. See Note 12 Đ Debt of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K) for
further discussion.
Unearned Revenue
Unearned
revenue at June 30, 2015 was comprised mainly of unearned revenue from volume
licensing programs. Unearned revenue from volume licensing programs represents
customer billings for multi-year licensing arrangements paid for either at
inception of the agreement or annually at the beginning of each coverage period
and accounted for as subscriptions with revenue recognized ratably over the
coverage period. Unearned revenue at June 30, 2015 also included payments for:
post-delivery support and consulting services to be performed in the future;
Xbox Live subscriptions and prepaid points; Microsoft Dynamics business
solutions products; Office 365 subscriptions; Skype prepaid credits and
subscriptions; Bundled Offerings; and other offerings for which we have been
paid in advance and earn the revenue when we provide the service or software,
or otherwise meet the revenue recognition criteria.
The following table outlines the expected future
recognition of unearned revenue as of June 30, 2015:
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
|
|||
|
|
|
|||
|
Three Months Ending, |
|
|
|
|
|
|
|
|||
|
September 30, 2015 |
|
$ |
8,889 |
|
|
December 31, 2015 |
|
|
7,172 |
|
|
March 31, 2016 |
|
|
4,848 |
|
|
June 30, 2016 |
|
|
2,314 |
|
|
Thereafter |
|
|
2,095 |
|
|
|
|
|||
|
Total |
|
$ |
25,318 |
|
|
|
|
|
|
|
Share Repurchases
On
September 16, 2013, our Board of Directors approved a share repurchase
program authorizing up to $40.0 billion in share repurchases. The share
repurchase program became effective on October 1, 2013, has no expiration
date, and may be suspended or discontinued at any time without notice. While
the program has no expiration date, we intend to complete it by
December 31, 2016. As of June 30, 2015, $21.9 billion remained of our
$40.0 billion share repurchase program.
During
fiscal year 2015, we repurchased 295 million shares of Microsoft common stock
for $13.2 billion under the share repurchase program approved by our Board of
Directors on September 16, 2013. During fiscal year 2014, we repurchased 175
million shares for $6.4 billion; 128 million shares were repurchased for $4.9
billion under the share repurchase program approved by our Board of Directors
on September 16, 2013, and 47 million shares were repurchased for $1.5 billion
under the share repurchase program that was announced on September 22, 2008 and
expired September 30, 2013. During fiscal year 2013, we repurchased 158 million
shares for $4.6 billion, under the share repurchase program announced on
September 22, 2008. All repurchases were made using cash resources.
Dividends
See Note 19 Đ
StockholdersŐ Equity of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K) for
further discussion.
Off-Balance Sheet Arrangements
We
provide indemnifications of varying scope and size to certain customers against
claims of intellectual property infringement made by third parties arising from
the use of our products and certain other matters. In evaluating estimated
losses on these indemnifications, we consider factors such as the degree of
probability of an unfavorable outcome and our ability to make a reasonable
estimate of the amount of loss. These obligations did not have a material
impact on our consolidated financial statements during the periods presented.
Contractual Obligations
The following
table summarizes the payments due by fiscal year for our outstanding
contractual obligations as of June 30, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
2016 |
|
|
2017-2018 |
|
|
2019-2020 |
|
|
Thereafter |
|
|
Total |
|
|||||
|
|
|
|||||||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||
|
Long-term debt: (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments |
|
$ |
2,500 |
|
|
$ |
1,050 |
|
|
$ |
3,750 |
|
|
$ |
23,163 |
|
|
$ |
30,463 |
|
|
Interest payments |
|
|
855 |
|
|
|
1,641 |
|
|
|
1,552 |
|
|
|
11,412 |
|
|
|
15,460 |
|
|
Construction commitments (b) |
|
|
681 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
681 |
|
|
Operating leases (c) |
|
|
863 |
|
|
|
1,538 |
|
|
|
1,135 |
|
|
|
1,617 |
|
|
|
5,153 |
|
|
Purchase commitments (d) |
|
|
13,018 |
|
|
|
989 |
|
|
|
164 |
|
|
|
261 |
|
|
|
14,432 |
|
|
Other long-term liabilities (e) |
|
|
0 |
|
|
|
237 |
|
|
|
75 |
|
|
|
639 |
|
|
|
951 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total contractual obligations |
|
$ |
17,917 |
|
|
$ |
5,455 |
|
|
$ |
6,676 |
|
|
$ |
37,092 |
|
|
$ |
67,140 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) See
Note 12 Đ Debt of the Notes to Financial Statements (Part II, Item 8 of
this Form 10-K).
(b) These
amounts represent commitments for the construction of buildings, building
improvements, and leasehold improvements.
(c) These
amounts represent undiscounted future minimum rental commitments under
noncancellable facilities leases.
(d) These
amounts represent purchase commitments, including all open purchase orders and
all contracts that are take-or-pay contracts that are not presented as
construction commitments above.
(e) We
have excluded long-term tax contingencies, other tax liabilities, deferred
income taxes, and long-term pension liabilities of $15.2 billion from the
amounts presented. We have also excluded unearned revenue and non-cash items.
Other Planned Uses of
Capital
We
will continue to invest in sales, marketing, product support infrastructure,
and existing and advanced areas of technology, as well as continue making
acquisitions that align with our business strategy. Additions to property and
equipment will continue, including new facilities, data centers, and computer
systems for research and development, sales and marketing, support, and
administrative staff. We expect capital expenditures to increase in coming years
in support of our productivity and platform strategy. We have operating leases
for most U.S. and international sales and support offices and certain
equipment. We have not engaged in any related party transactions or
arrangements with unconsolidated entities or other persons that are reasonably
likely to materially affect liquidity or the availability of capital resources.
Liquidity
We
earn a significant amount of our operating income outside the U.S., which is
deemed to be permanently reinvested in foreign jurisdictions. As a result, as
discussed above under Cash, Cash Equivalents, and Investments, the majority of
our cash, cash equivalents, and short-term investments are held by foreign
subsidiaries. We currently do not intend nor foresee a need to repatriate these
funds. We expect existing domestic cash, cash equivalents, short-term
investments, cash flows from operations, and access to capital markets to
continue to be sufficient to fund our domestic operating activities and cash
commitments for investing and financing activities, such as regular quarterly
dividends, debt maturities, and material capital expenditures, for at least the
next 12 months and thereafter for the foreseeable future. In addition, we
expect existing foreign cash, cash equivalents, short-term investments, and
cash flows from operations to continue to be sufficient to fund our foreign
operating activities and cash commitments for investing activities, such as
material capital expenditures, for at least the next 12 months and thereafter
for the foreseeable future.
Should
we require more capital in the U.S. than is generated by our operations
domestically, for example to fund significant discretionary activities, such as
business acquisitions and share repurchases, we could elect to repatriate
future earnings from foreign jurisdictions or raise capital in the U.S. through
debt or equity issuances. These alternatives could result in higher effective
tax rates, increased interest expense, or dilution of our earnings. We have
borrowed funds domestically and continue to believe we have the ability to do
so at reasonable interest rates.
RECENT ACCOUNTING GUIDANCE
See Note 1 Đ Accounting Policies of the Notes to
Financial Statements (Part II,
Item 8 of this Form 10-K) for further discussion.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Our
consolidated financial statements and accompanying notes are prepared in
accordance with U.S. GAAP. Preparing consolidated financial statements requires
management to make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenue, and expenses. These estimates and assumptions
are affected by managementŐs application of accounting policies. Critical
accounting policies for us include revenue recognition, impairment of investment
securities, goodwill, research and development costs, contingencies, income
taxes, and inventories.
Revenue Recognition
Revenue
recognition for multiple-element arrangements requires judgment to determine if
multiple elements exist, whether elements can be accounted for as separate
units of accounting, and if so, the fair value for each of the elements.
Judgment
is also required to assess whether future releases of certain software
represent new products or upgrades and enhancements to existing products.
Certain volume licensing arrangements include a perpetual license for current
products combined with rights to receive unspecified future versions of
software products and are accounted for as subscriptions, with billings
recorded as unearned revenue and recognized as revenue ratably over the
coverage period.
Software updates are evaluated on a case-by-case
basis to determine whether they meet the definition of an upgrade, which may
require revenue to be deferred and recognized when the upgrade is delivered. If
it is determined that implied post-contract customer support (ŇPCSÓ) is being
provided, revenue from the arrangement is deferred and recognized over the
implied PCS term. If updates are determined to not meet the definition of an
upgrade, revenue is generally recognized as products are shipped or made
available.
Microsoft
enters into arrangements that can include various combinations of software,
services, and hardware. Where elements are delivered over different periods of
time, and when allowed under U.S. GAAP, revenue is allocated to the respective
elements based on their relative selling prices at the inception of the
arrangement, and revenue is recognized as each element is delivered. We use a
hierarchy to determine the fair value to be used for allocating revenue to
elements: (i) vendor-specific objective evidence of fair value (ŇVSOEÓ),
(ii) third-party evidence, and (iii) best estimate of selling price
(ŇESPÓ). For software elements, we follow the industry specific software
guidance which only allows for the use of VSOE in establishing fair value.
Generally, VSOE is the price charged when the deliverable is sold separately or
the price established by management for a product that is not yet sold if it is
probable that the price will not change before introduction into the
marketplace. ESPs are established as best estimates of what the selling prices
would be if the deliverables were sold regularly on a stand-alone basis. Our
process for determining ESPs requires judgment and considers multiple factors
that may vary over time depending upon the unique facts and circumstances
related to each deliverable.
In
January 2015, we announced Windows 10 will be free to all qualified existing
users of Windows 7 and Windows 8.1. This offer differs from historical offers
preceding the launch of new versions of Windows as it is being made available
for free to existing users in addition to new customers after the offer
announcement. We evaluated the nature and accounting treatment of the Windows
10 offer and determined that it represents a marketing and promotional
activity, in part because the offer is being made available for free to
existing users. As this is a marketing and promotional activity, revenue
recognition of new sales of Windows 8 will continue to be recognized as
delivered.
Impairment of Investment Securities
We
review investments quarterly for indicators of other-than-temporary impairment.
This determination requires significant judgment. In making this judgment, we
employ a systematic methodology quarterly that considers available quantitative
and qualitative evidence in evaluating potential impairment of our investments.
If the cost of an investment exceeds its fair value, we evaluate, among other
factors, general market conditions, credit quality of debt instrument issuers,
the duration and extent to which the fair value is less than cost, and for
equity securities, our intent and ability to hold, or plans to sell, the
investment. For fixed-income securities, we also evaluate whether we have plans
to sell the security or it is more likely than not that we will be required to
sell the security before recovery. We also consider specific adverse conditions
related to the financial health of and business outlook for the investee,
including industry and sector performance, changes in technology, and
operational and financing cash flow factors. Once a decline in fair value is
determined to be other-than-temporary, an impairment charge is recorded to
other income (expense), net and a new cost basis in the investment is
established. If market, industry, and/or investee conditions deteriorate, we
may incur future impairments.
Goodwill
We
allocate goodwill to reporting units based on the reporting unit expected to
benefit from the business combination. We evaluate our reporting units on an
annual basis and, if necessary, reassign goodwill using a relative fair value
allocation approach. Goodwill is tested for impairment at the reporting unit
level (operating segment or one level below an operating segment) on an annual
basis (May 1 for us) and between annual tests if an event occurs or
circumstances change that would more likely than not reduce the fair value of a
reporting unit below its carrying value. These events or circumstances could
include a significant change in the business climate, legal factors, operating
performance indicators, competition, or sale or disposition of a significant
portion of a reporting unit.
Application
of the goodwill impairment test requires judgment, including the identification
of reporting units, assignment of assets and liabilities to reporting units,
assignment of goodwill to reporting units, and determination of the fair value
of each reporting unit. The fair value of each reporting unit is estimated
primarily through the use of a discounted cash flow methodology. This analysis
requires significant judgments, including estimation of future cash flows,
which is dependent on internal forecasts, estimation of the long-term rate of
growth for our business, estimation of the useful life over which cash flows
will occur, and determination of our weighted average cost of capital.
The
estimates used to calculate the fair value of a reporting unit change from year
to year based on operating results, market conditions, and other factors.
Changes in these estimates and assumptions could materially affect the
determination of fair value and goodwill impairment for each reporting unit.
Based on the results of our annual goodwill
impairment testing as of May 1, 2015, we determined that goodwill associated
with our Phone Hardware reporting unit was impaired, resulting in a material
charge to earnings in the fourth quarter of fiscal year 2015. As of June 30,
2015, none of our reporting units were considered to be at risk of impairment.
Research and Development Costs
Costs incurred internally in researching and
developing a computer software product are charged to expense until
technological feasibility has been established for the product. Once
technological feasibility is established, all software costs are capitalized
until the product is available for general release to customers. Judgment is
required in determining when technological feasibility of a product is
established. We have determined that technological feasibility for our software
products is reached after all high-risk development issues have been resolved
through coding and testing. Generally, this occurs shortly before the products
are released to manufacturing. The amortization of these costs is included in
cost of revenue over the estimated life of the products.
Legal and Other Contingencies
The
outcomes of legal proceedings and claims brought against us are subject to significant
uncertainty. An estimated loss from a loss contingency such as a legal
proceeding or claim is accrued by a charge to income if it is probable that an
asset has been impaired or a liability has been incurred and the amount of the
loss can be reasonably estimated. In determining whether a loss should be
accrued we evaluate, among other factors, the degree of probability of an
unfavorable outcome and the ability to make a reasonable estimate of the amount
of loss. Changes in these factors could materially impact our consolidated
financial statements.
Income Taxes
The
objectives of accounting for income taxes are to recognize the amount of taxes
payable or refundable for the current year and deferred tax liabilities and
assets for the future tax consequences of events that have been recognized in
an entityŐs financial statements or tax returns. We recognize the tax benefit
from an uncertain tax position only if it is more likely than not that the tax
position will be sustained on examination by the taxing authorities, based on
the technical merits of the position. The tax benefits recognized in the
financial statements from such a position are measured based on the largest
benefit that has a greater than 50% likelihood of being realized upon ultimate
settlement. Accounting literature also provides guidance on derecognition of
income tax assets and liabilities, classification of current and deferred
income tax assets and liabilities, accounting for interest and penalties
associated with tax positions, and income tax disclosures. Judgment is required
in assessing the future tax consequences of events that have been recognized in
our consolidated financial statements or tax returns. Variations in the actual
outcome of these future tax consequences could materially impact our
consolidated financial statements.
Inventories
Inventories
are stated at average cost, subject to the lower of cost or market. Cost
includes materials, labor, and manufacturing overhead related to the purchase
and production of inventories. We regularly review inventory quantities on
hand, future purchase commitments with our suppliers, and the estimated utility
of our inventory. These reviews include analysis of demand forecasts, product
life cycle status, product development plans, current sales levels, pricing
strategy, and component cost trends. If our review indicates a reduction in
utility below carrying value, we reduce our inventory to a new cost basis
through a charge to cost of revenue. The determination of market value and the
estimated volume of demand used in the lower of cost or market analysis require
significant judgment.
STATEMENT OF MANAGEMENTŐS RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management is
responsible for the preparation of the consolidated financial statements and
related information that are presented in this report. The consolidated
financial statements, which include amounts based on managementŐs estimates and
judgments, have been prepared in conformity with accounting principles
generally accepted in the United States of America.
The Company
designs and maintains accounting and internal control systems to provide
reasonable assurance at reasonable cost that assets are safeguarded against
loss from unauthorized use or disposition, and that the financial records are
reliable for preparing consolidated financial statements and maintaining
accountability for assets. These systems are augmented by written policies, an
organizational structure providing division of responsibilities, careful
selection and training of qualified personnel, and a program of internal
audits.
The Company
engaged Deloitte & Touche LLP, an independent registered public
accounting firm, to audit and render an opinion on the consolidated financial
statements and internal control over financial reporting in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
The Board of
Directors, through its Audit Committee, consisting solely of independent
directors of the Company, meets periodically with management, internal
auditors, and our independent registered public accounting firm to ensure that
each is meeting its responsibilities and to discuss matters concerning internal
controls and financial reporting. Deloitte & Touche LLP and the
internal auditors each have full and free access to the Audit Committee.
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Satya
Nadella |
|
Chief Executive
Officer |
|
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Amy E. Hood |
|
Executive
Vice President and Chief Financial Officer |
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Frank H.
Brod |
|
Corporate
Vice President, Finance and Administration; |
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
RISKS
We
are exposed to economic risk from foreign exchange rates, interest rates,
credit risk, equity prices, and commodity prices. A portion of these risks is
hedged, but they may impact our consolidated financial statements.
Foreign Currency
Certain
forecasted transactions, assets, and liabilities are exposed to foreign
currency risk. We monitor our foreign currency exposures daily and use hedges
where practicable to offset the risks and maximize the economic effectiveness
of our foreign currency positions. Principal currencies hedged include the
euro, Japanese yen, British pound, Canadian dollar, and Australian dollar.
Interest Rate
Our
fixed-income portfolio is diversified across credit sectors and maturities,
consisting primarily of investment-grade securities. The credit risk and
average maturity of the fixed-income portfolio is managed to achieve economic
returns that correlate to certain global and domestic fixed-income indices. In
addition, we use ŇTo Be AnnouncedÓ forward purchase commitments of
mortgage-backed assets to gain exposure to agency mortgage-backed securities.
Equity
Our
equity portfolio consists of global, developed, and emerging market securities
that are subject to market price risk. We manage the securities relative
to certain global and domestic indices and expect their economic risk and
return to correlate with these indices.
Commodity
We
use broad-based commodity exposures to enhance portfolio returns and facilitate
portfolio diversification. Our investment portfolio has exposure to a variety
of commodities, including precious metals, energy, and grain. We manage these
exposures relative to global commodity indices and expect their economic risk
and return to correlate with these indices.
VALUE-AT-RISK
We
use a value-at-risk (ŇVaRÓ) model to estimate and quantify our market risks.
VaR is the expected loss, for a given confidence level, in the fair value of our
portfolio due to adverse market movements over a defined time horizon. The VaR
model is not intended to represent actual losses in fair value, including
determinations of other-than-temporary losses in fair value in accordance with
U.S. GAAP, but is used as a risk estimation and management tool. The
distribution of the potential changes in total market value of all holdings is
computed based on the historical volatilities and correlations among foreign
exchange rates, interest rates, equity prices, and commodity prices, assuming
normal market conditions.
The
VaR is calculated as the total loss that will not be exceeded at the 97.5
percentile confidence level or, alternatively stated, the losses could exceed
the VaR in 25 out of 1,000 cases. Several risk factors are not captured in the
model, including liquidity risk, operational risk, and legal risk.
The following table sets forth the one-day VaR for substantially all of
our positions as of June 30, 2015 and 2014 and for the year ended June 30,
2015:
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(In millions) |
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|||||||||||||||||||
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June 30, |
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June 30, |
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Year Ended June 30, 2015 |
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Risk Categories |
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Average |
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High |
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Low |
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|||||||||||||||
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Foreign currency |
|
$ |
120 |
|
|
$ |
179 |
|
|
$ |
162 |
|
|
$ |
200 |
|
|
$ |
107 |
|
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Interest rate |
|
$ |
51 |
|
|
$ |
73 |
|
|
$ |
57 |
|
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$ |
74 |
|
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$ |
48 |
|
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Equity |
|
$ |
149 |
|
|
$ |
176 |
|
|
$ |
161 |
|
|
$ |
178 |
|
|
$ |
146 |
|
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Commodity |
|
$ |
13 |
|
|
$ |
17 |
|
|
$ |
16 |
|
|
$ |
20 |
|
|
$ |
11 |
|
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Total one-day
VaR for the combined risk categories was $237 million at June 30, 2015 and $333
million at June 30, 2014. The total VaR is 29% less at June 30, 2015, and
25% less at June 30, 2014, than the sum of the separate risk categories in
the table above due to the diversification benefit of the combination of risks.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INCOME STATEMENTS
|
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|
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(In millions, except per share amounts) |
|
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|
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|||
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|||||||||||
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|||||||||
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Year Ended June 30, |
|
2015 |
|
|
2014 |
|
|
2013 |
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|
|
|
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Revenue |
|
$ |
93,580 |
|
|
$ |
86,833 |
|
|
$ |
77,849 |
|
|
Cost of revenue |
|
|
33,038 |
|
|
|
27,078 |
|
|
|
20,385 |
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Gross margin |
|
|
60,542 |
|
|
|
59,755 |
|
|
|
57,464 |
|
|
Research and development |
|
|
12,046 |
|
|
|
11,381 |
|
|
|
10,411 |
|
|
Sales and marketing |
|
|
15,713 |
|
|
|
15,811 |
|
|
|
15,276 |
|
|
General and administrative |
|
|
4,611 |
|
|
|
4,677 |
|
|
|
5,013 |
|
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Impairment, integration, and restructuring |
|
|
10,011 |
|
|
|
127 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Operating income |
|
|
18,161 |
|
|
|
27,759 |
|
|
|
26,764 |
|
|
Other income, net |
|
|
346 |
|
|
|
61 |
|
|
|
288 |
|
|
|
|
|
|
|
|
|
|
|
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|||
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Income before income taxes |
|
|
18,507 |
|
|
|
27,820 |
|
|
|
27,052 |
|
|
Provision for income taxes |
|
|
6,314 |
|
|
|
5,746 |
|
|
|
5,189 |
|
|
|
|
|
|
|
|
|
|
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Net income |
|
$ |
12,193 |
|
|
$ |
22,074 |
|
|
$ |
21,863 |
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|
|
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Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.49 |
|
|
$ |
2.66 |
|
|
$ |
2.61 |
|
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Diluted |
|
$ |
1.48 |
|
|
$ |
2.63 |
|
|
$ |
2.58 |
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Weighted average shares
outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
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Basic |
|
|
8,177 |
|
|
|
8,299 |
|
|
|
8,375 |
|
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Diluted |
|
|
8,254 |
|
|
|
8,399 |
|
|
|
8,470 |
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Cash dividends declared per common share |
|
$ |
1.24 |
|
|
$ |
1.12 |
|
|
$ |
0.92 |
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|
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|||||||||||
See
accompanying notes.
COMPREHENSIVE INCOME STATEMENTS
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|
|
|
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(In millions) |
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|
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|||
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|
|||||||||||
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|||||||||
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Year Ended June 30, |
|
2015 |
|
|
2014 |
|
|
2013 |
|
|||
|
|
|
|
|
|||||||||
|
Net income |
|
$ |
12,193 |
|
|
$ |
22,074 |
|
|
$ |
21,863 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive
income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains
(losses) on derivatives (net of tax effects of $20, $(4), and $(14)) |
|
|
559 |
|
|
|
(35 |
) |
|
|
(26 |
) |
|
Net unrealized gains
(losses) on investments (net of tax effects of $(197), $936, and $195) |
|
|
(362 |
) |
|
|
1,737 |
|
|
|
363 |
|
|
Translation adjustments
and other (net of tax effects of $16, $12, and $(8)) |
|
|
(1,383 |
) |
|
|
263 |
|
|
|
(16 |
) |
|
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|
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|
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|
|
|
|||
|
Other comprehensive income (loss) |
|
|
(1,186 |
) |
|
|
1,965 |
|
|
|
321 |
|
|
|
|
|
|
|
|
|
|
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|
|||
|
Comprehensive income |
|
$ |
11,007 |
|
|
$ |
24,039 |
|
|
$ |
22,184 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
||
|
|
|
|||||||
|
|
|
|
||||||
|
June 30, |
|
2015 |
|
|
2014 |
|
||
|
|
|
|
||||||
|
Assets |
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
5,595 |
|
|
$ |
8,669 |
|
|
Short-term investments (including securities loaned of $75 and
$541) |
|
|
90,931 |
|
|
|
77,040 |
|
|
|
|
|
|
|
|
|||
|
Total cash, cash equivalents, and short-term investments |
|
|
96,526 |
|
|
|
85,709 |
|
|
Accounts receivable, net of allowance for doubtful accounts of $335
and $301 |
|
|
17,908 |
|
|
|
19,544 |
|
|
Inventories |
|
|
2,902 |
|
|
|
2,660 |
|
|
Deferred income taxes |
|
|
1,915 |
|
|
|
1,941 |
|
|
Other |
|
|
5,461 |
|
|
|
4,392 |
|
|
|
|
|
|
|
|
|||
|
Total current assets |
|
|
124,712 |
|
|
|
114,246 |
|
|
Property and equipment, net of accumulated depreciation of $17,606
and $14,793 |
|
|
14,731 |
|
|
|
13,011 |
|
|
Equity and other investments |
|
|
12,053 |
|
|
|
14,597 |
|
|
Goodwill |
|
|
16,939 |
|
|
|
20,127 |
|
|
Intangible assets, net |
|
|
4,835 |
|
|
|
6,981 |
|
|
Other long-term assets |
|
|
2,953 |
|
|
|
3,422 |
|
|
|
|
|
|
|
|
|||
|
Total assets |
|
$ |
176,223 |
|
|
$ |
172,384 |
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholdersŐ equity |
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
6,591 |
|
|
$ |
7,432 |
|
|
Short-term debt |
|
|
4,985 |
|
|
|
2,000 |
|
|
Current portion of long-term debt |
|
|
2,499 |
|
|
|
0 |
|
|
Accrued compensation |
|
|
5,096 |
|
|
|
4,797 |
|
|
Income taxes |
|
|
606 |
|
|
|
782 |
|
|
Short-term unearned revenue |
|
|
23,223 |
|
|
|
23,150 |
|
|
Securities lending payable |
|
|
92 |
|
|
|
558 |
|
|
Other |
|
|
6,766 |
|
|
|
6,906 |
|
|
|
|
|
|
|
|
|||
|
Total current liabilities |
|
|
49,858 |
|
|
|
45,625 |
|
|
Long-term debt |
|
|
27,808 |
|
|
|
20,645 |
|
|
Long-term unearned revenue |
|
|
2,095 |
|
|
|
2,008 |
|
|
Deferred income taxes |
|
|
2,835 |
|
|
|
2,728 |
|
|
Other long-term liabilities |
|
|
13,544 |
|
|
|
11,594 |
|
|
|
|
|
|
|
|
|||
|
Total liabilities |
|
|
96,140 |
|
|
|
82,600 |
|
|
|
|
|
|
|
|
|||
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
StockholdersŐ equity: |
|
|
|
|
|
|
|
|
|
Common stock and paid-in
capital Đ shares authorized 24,000; outstanding 8,027 and 8,239 |
|
|
68,465 |
|
|
|
68,366 |
|
|
Retained earnings |
|
|
9,096 |
|
|
|
17,710 |
|
|
Accumulated other comprehensive income |
|
|
2,522 |
|
|
|
3,708 |
|
|
|
|
|
|
|
|
|||
|
Total stockholdersŐ equity |
|
|
80,083 |
|
|
|
89,784 |
|
|
|
|
|
|
|
|
|||
|
Total liabilities and stockholdersŐ equity |
|
$ |
176,223 |
|
|
$ |
172,384 |
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
CASH FLOWS STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
|||
|
|
|
|||||||||||
|
|
|
|
|
|||||||||
|
Year Ended June 30, |
|
2015 |
|
|
2014 |
|
|
2013 |
|
|||
|
|
|
|
|
|||||||||
|
Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
12,193 |
|
|
$ |
22,074 |
|
|
$ |
21,863 |
|
|
Adjustments to reconcile net income to net cash from operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill and asset impairments |
|
|
7,498 |
|
|
|
0 |
|
|
|
0 |
|
|
Depreciation, amortization, and other |
|
|
5,957 |
|
|
|
5,212 |
|
|
|
3,755 |
|
|
Stock-based compensation expense |
|
|
2,574 |
|
|
|
2,446 |
|
|
|
2,406 |
|
|
Net recognized losses (gains) on investments and derivatives |
|
|
(443 |
) |
|
|
(109 |
) |
|
|
80 |
|
|
Excess tax benefits from stock-based compensation |
|
|
(588 |
) |
|
|
(271 |
) |
|
|
(209 |
) |
|
Deferred income taxes |
|
|
224 |
|
|
|
(331 |
) |
|
|
(19 |
) |
|
Deferral of unearned revenue |
|
|
45,072 |
|
|
|
44,325 |
|
|
|
44,253 |
|
|
Recognition of unearned revenue |
|
|
(44,920 |
) |
|
|
(41,739 |
) |
|
|
(41,921 |
) |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
1,456 |
|
|
|
(1,120 |
) |
|
|
(1,807 |
) |
|
Inventories |
|
|
(272 |
) |
|
|
(161 |
) |
|
|
(802 |
) |
|
Other current assets |
|
|
62 |
|
|
|
(29 |
) |
|
|
(129 |
) |
|
Other long-term assets |
|
|
346 |
|
|
|
(628 |
) |
|
|
(478 |
) |
|
Accounts payable |
|
|
(1,054 |
) |
|
|
473 |
|
|
|
537 |
|
|
Other current liabilities |
|
|
(624 |
) |
|
|
1,075 |
|
|
|
146 |
|
|
Other long-term liabilities |
|
|
1,599 |
|
|
|
1,014 |
|
|
|
1,158 |
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Net cash from operations |
|
|
29,080 |
|
|
|
32,231 |
|
|
|
28,833 |
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Financing |
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of
short-term debt, maturities of 90 days or less, net |
|
|
4,481 |
|
|
|
500 |
|
|
|
0 |
|
|
Proceeds from issuance of debt |
|
|
10,680 |
|
|
|
10,350 |
|
|
|
4,883 |
|
|
Repayments of debt |
|
|
(1,500 |
) |
|
|
(3,888 |
) |
|
|
(1,346 |
) |
|
Common stock issued |
|
|
634 |
|
|
|
607 |
|
|
|
931 |
|
|
Common stock repurchased |
|
|
(14,443 |
) |
|
|
(7,316 |
) |
|
|
(5,360 |
) |
|
Common stock cash dividends paid |
|
|
(9,882 |
) |
|
|
(8,879 |
) |
|
|
(7,455 |
) |
|
Excess tax benefits from stock-based compensation |
|
|
588 |
|
|
|
271 |
|
|
|
209 |
|
|
Other |
|
|
362 |
|
|
|
(39 |
) |
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|||
|
Net cash used in financing |
|
|
(9,080 |
) |
|
|
(8,394 |
) |
|
|
(8,148 |
) |
|
|
|
|
|
|
|
|
|
|
|
|||
|
Investing |
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property and equipment |
|
|
(5,944 |
) |
|
|
(5,485 |
) |
|
|
(4,257 |
) |
|
Acquisition of companies,
net of cash acquired, and purchases of intangible and other assets |
|
|
(3,723 |
) |
|
|
(5,937 |
) |
|
|
(1,584 |
) |
|
Purchases of investments |
|
|
(98,729 |
) |
|
|
(72,690 |
) |
|
|
(75,396 |
) |
|
Maturities of investments |
|
|
15,013 |
|
|
|
5,272 |
|
|
|
5,130 |
|
|
Sales of investments |
|
|
70,848 |
|
|
|
60,094 |
|
|
|
52,464 |
|
|
Securities lending payable |
|
|
(466 |
) |
|
|
(87 |
) |
|
|
(168 |
) |
|
|
|
|
|
|
|
|
|
|
|
|||
|
Net cash used in investing |
|
|
(23,001 |
) |
|
|
(18,833 |
) |
|
|
(23,811 |
) |
|
|
|
|
|
|
|
|
|
|
|
|||
|
Effect of exchange rates on cash and cash equivalents |
|
|
(73 |
) |
|
|
(139 |
) |
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|||
|
Net change in cash and cash equivalents |
|
|
(3,074 |
) |
|
|
4,865 |
|
|
|
(3,134 |
) |
|
Cash and cash equivalents, beginning of period |
|
|
8,669 |
|
|
|
3,804 |
|
|
|
6,938 |
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Cash and cash equivalents, end of period |
|
$ |
5,595 |
|
|
$ |
8,669 |
|
|
$ |
3,804 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
STOCKHOLDERSŐ EQUITY STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
|||
|
|
|
|||||||||||
|
|
|
|
|
|||||||||
|
Year Ended June 30, |
|
2015 |
|
|
2014 |
|
|
2013 |
|
|||
|
|
|
|
|
|||||||||
|
Common stock and paid-in capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
$ |
68,366 |
|
|
$ |
67,306 |
|
|
$ |
65,797 |
|
|
Common stock issued |
|
|
634 |
|
|
|
607 |
|
|
|
920 |
|
|
Common stock repurchased |
|
|
(3,700 |
) |
|
|
(2,328 |
) |
|
|
(2,014 |
) |
|
Stock-based compensation expense |
|
|
2,574 |
|
|
|
2,446 |
|
|
|
2,406 |
|
|
Stock-based compensation income tax benefits |
|
|
588 |
|
|
|
272 |
|
|
|
190 |
|
|
Other, net |
|
|
3 |
|
|
|
63 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Balance, end of period |
|
|
68,465 |
|
|
|
68,366 |
|
|
|
67,306 |
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Retained earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
|
17,710 |
|
|
|
9,895 |
|
|
|
(856 |
) |
|
Net income |
|
|
12,193 |
|
|
|
22,074 |
|
|
|
21,863 |
|
|
Common stock cash dividends |
|
|
(10,063 |
) |
|
|
(9,271 |
) |
|
|
(7,694 |
) |
|
Common stock repurchased |
|
|
(10,744 |
) |
|
|
(4,988 |
) |
|
|
(3,418 |
) |
|
|
|
|
|
|
|
|
|
|
|
|||
|
Balance, end of period |
|
|
9,096 |
|
|
|
17,710 |
|
|
|
9,895 |
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Accumulated other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
|
3,708 |
|
|
|
1,743 |
|
|
|
1,422 |
|
|
Other comprehensive income (loss) |
|
|
(1,186 |
) |
|
|
1,965 |
|
|
|
321 |
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Balance, end of period |
|
|
2,522 |
|
|
|
3,708 |
|
|
|
1,743 |
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total stockholdersŐ equity |
|
$ |
80,083 |
|
|
$ |
89,784 |
|
|
$ |
78,944 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 Ń ACCOUNTING POLICIES
Accounting Principles
The
consolidated financial statements and accompanying notes are prepared in
accordance with accounting principles generally accepted in the United States
of America (ŇU.S. GAAPÓ).
We have recast
certain prior period amounts to conform to the current period presentation,
with no impact on consolidated net income or cash flows.
Principles of Consolidation
The consolidated financial statements include the
accounts of Microsoft Corporation and its subsidiaries. Intercompany
transactions and balances have been eliminated. Equity investments through
which we are able to exercise significant influence over but do not control the
investee and are not the primary beneficiary of the investeeŐs activities are
accounted for using the equity method. Investments through which we are not
able to exercise significant influence over the investee and which do not have
readily determinable fair values are accounted for under the cost method.
Estimates and Assumptions
Preparing financial statements requires management
to make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenue, and expenses. Examples of estimates include: loss
contingencies; product warranties; the fair value of, and/or potential impairment
of goodwill and intangibles assets, for our reporting units; product life
cycles; useful lives of our tangible and intangible assets; allowances for
doubtful accounts; allowances for product returns; the market value of our
inventory; and stock-based compensation forfeiture rates. Examples of
assumptions include: the elements comprising a software arrangement, including
the distinction between upgrades or enhancements and new products; when
technological feasibility is achieved for our products; the potential outcome
of future tax consequences of events that have been recognized in our
consolidated financial statements or tax returns; and determining when
investment impairments are other-than-temporary. Actual results and outcomes
may differ from managementŐs estimates and assumptions.
Foreign Currencies
Assets
and liabilities recorded in foreign currencies are translated at the exchange
rate on the balance sheet date. Revenue and expenses are translated at average
rates of exchange prevailing during the year. Translation adjustments resulting
from this process are recorded to other comprehensive income (ŇOCIÓ).
Revenue Recognition
Revenue is
recognized when persuasive evidence of an arrangement exists, delivery has
occurred, the fee is fixed or determinable, and collectability is probable.
Revenue generally is recognized net of allowances for returns and any taxes
collected from customers and subsequently remitted to governmental authorities.
Revenue
recognition for multiple-element arrangements requires judgment to determine if
multiple elements exist, whether elements can be accounted for as separate
units of accounting, and if so, the fair value for each of the elements.
Microsoft
enters into arrangements that can include various combinations of software,
services, and hardware. Where elements are delivered over different periods of
time, and when allowed under U.S. GAAP, revenue is allocated to the respective
elements based on their relative selling prices at the inception of the
arrangement, and revenue is recognized as each element is delivered. We use a
hierarchy to determine the fair value to be used for allocating revenue to
elements: (i) vendor-specific objective evidence of fair value (ŇVSOEÓ), (ii) third-party
evidence, and (iii) best estimate of selling price (ŇESPÓ). For software
elements, we follow the industry specific software guidance which only allows
for the use of VSOE in establishing fair value. Generally, VSOE is the price
charged when the deliverable is sold separately or the price established by
management for a product that is not yet sold if it is probable that the price
will not change before introduction into the marketplace. ESPs are established
as best estimates of what the selling prices would be if the deliverables were
sold regularly on a stand-alone basis. Our process for determining ESPs
requires judgment and considers multiple factors that may vary over time
depending upon the unique facts and circumstances related to each deliverable.
Revenue for retail packaged products, products
licensed to original equipment manufacturers (ŇOEMsÓ), and perpetual licenses
under certain volume licensing programs generally is recognized as products are
shipped or made available.
Technology
guarantee programs are accounted for as multiple-element arrangements as
customers receive free or significantly discounted rights to use upcoming new
versions of a software product if they license existing versions of the product
during the eligibility period. Revenue is allocated between the existing
product and the new product, and revenue allocated to the new product is
deferred until that version is delivered. The revenue allocation is based on
the VSOE of fair value of the products. The VSOE of fair value for upcoming new
products are based on the price determined by management having the relevant
authority when the element is not yet sold separately, but is expected to be
sold in the near future at the price set by management.
Software
updates that will be provided free of charge are evaluated on a case-by-case
basis to determine whether they meet the definition of an upgrade and create a
multiple-element arrangement, which may require revenue to be deferred and
recognized when the upgrade is delivered, or if it is determined that implied
post-contract customer support (ŇPCSÓ) is being provided, the arrangement is
accounted for as a multiple-element arrangement and all revenue from the
arrangement is deferred and recognized over the implied PCS term when the VSOE
of fair value does not exist. If updates are determined to not meet the
definition of an upgrade, revenue is generally recognized as products are
shipped or made available.
Certain
volume licensing arrangements include a perpetual license for current products
combined with rights to receive unspecified future versions of software
products, which we have determined are additional software products and are
therefore accounted for as subscriptions, with billings recorded as unearned revenue
and recognized as revenue ratably over the coverage period. Arrangements that
include term-based licenses for current products with the right to use
unspecified future versions of the software during the coverage period, are
also accounted for as subscriptions, with revenue recognized ratably over the
coverage period.
Revenue
from cloud-based services arrangements that allow for the use of a hosted
software product or service over a contractually determined period of time
without taking possession of software are accounted for as subscriptions with
billings recorded as unearned revenue and recognized as revenue ratably over
the coverage period beginning on the date the service is made available to
customers. Revenue from cloud-based services arrangements that are provided on
a consumption basis (for example, the amount of storage used in a particular
period) is recognized commensurate with the customer utilization of such
resources.
Some
volume licensing arrangements include time-based subscriptions for cloud-based
services and software offerings that are accounted for as subscriptions. These
arrangements are considered multiple-element arrangements. However, because all
elements are accounted for as subscriptions and have the same coverage period
and delivery pattern, they have the same revenue recognition timing.
Revenue
related to phones, Surface devices, Xbox consoles, games published by us, and
other hardware components is generally recognized when ownership is transferred
to the resellers or to end customers when selling directly through Microsoft
retail stores and online marketplaces. A portion of revenue may be deferred
when these products are combined with software elements, and/or services.
Revenue related to licensing for games published by third parties for use on
the Xbox consoles is recognized when games are manufactured by the game
publishers.
Display
advertising revenue is recognized as advertisements are displayed. Search
advertising revenue is recognized when the ad appears in the search results or
when the action necessary to earn the revenue has been completed. Consulting
services revenue is recognized as services are rendered, generally based on the
negotiated hourly rate in the consulting arrangement and the number of hours
worked during the period. Consulting revenue for fixed-price services
arrangements is recognized as services are provided. Revenue from prepaid
points redeemable for the purchase of software or services is recognized upon
redemption of the points and delivery of the software or services.
Cost of Revenue
Cost
of revenue includes: manufacturing and distribution costs for products sold and
programs licensed; operating costs related to product support service centers
and product distribution centers; costs incurred to include software on PCs
sold by OEMs, to drive traffic to our websites, and to acquire online
advertising space; costs incurred to support and maintain Internet-based
products and services, including datacenter costs and royalties; warranty
costs; inventory valuation adjustments; costs associated with the delivery of
consulting services; and the amortization of capitalized software development
costs. Capitalized software development costs are amortized over the estimated
lives of the products.
Product Warranty
We
provide for the estimated costs of fulfilling our obligations under hardware
and software warranties at the time the related revenue is recognized. For
hardware warranties, we estimate the costs based on historical and projected
product failure rates, historical and projected repair costs, and knowledge of
specific product failures (if any). The specific hardware warranty terms and
conditions vary depending upon the product sold and the country in which we do
business, but generally include parts and labor over a period generally ranging
from 90 days to three years. For software warranties, we estimate the
costs to provide bug fixes, such as security patches, over the estimated life
of the software. We regularly reevaluate our estimates to assess the adequacy
of the recorded warranty liabilities and adjust the amounts as necessary.
Research and Development
Research
and development expenses include payroll, employee benefits, stock-based
compensation expense, and other headcount-related expenses associated with
product development. Research and development expenses also include third-party
development and programming costs, localization costs incurred to translate
software for international markets, and the amortization of purchased software
code and services content. Such costs related to software development are
included in research and development expense until the point that technological
feasibility is reached, which for our software products, is generally shortly
before the products are released to manufacturing. Once technological feasibility
is reached, such costs are capitalized and amortized to cost of revenue over
the estimated lives of the products.
Sales and Marketing
Sales
and marketing expenses include payroll, employee benefits, stock-based
compensation expense, and other headcount-related expenses associated with
sales and marketing personnel, and the costs of advertising, promotions, trade
shows, seminars, and other programs. Advertising costs are expensed as
incurred. Advertising expense was $1.9 billion, $2.3 billion, and $2.6 billion
in fiscal years 2015, 2014, and 2013, respectively.
Stock-Based Compensation
We
measure stock-based compensation cost at the grant date based on the fair value
of the award and recognize it as expense, net of estimated forfeitures, over
the vesting or service period, as applicable, of the stock award (generally
four to five years) using the straight-line method.
Employee Stock Purchase Plan
Shares
of our common stock may be purchased by employees at three-month intervals at
90% of the fair market value of the stock on the last day of each three-month
period. Compensation expense for the employee stock purchase plan is measured
as the discount the employee is entitled to upon purchase and is recognized in
the period of purchase.
Income Taxes
Income
tax expense includes U.S. and international income taxes, the provision for
U.S. taxes on undistributed earnings of international subsidiaries not deemed
to be permanently invested, and interest and penalties on uncertain tax
positions. Certain income and expenses are not reported in tax returns and
financial statements in the same year. The tax effect of such temporary
differences is reported as deferred income taxes. Deferred tax assets are
reported net of a valuation allowance when it is more likely than not that a
tax benefit will not be realized. The deferred income taxes are classified as
current or long-term based on the classification of the related asset or
liability.
Fair Value Measurements
We account for certain assets and liabilities at
fair value. The hierarchy below lists three levels of fair value based on the
extent to which inputs used in measuring fair value are observable in the
market. We categorize each of our fair value measurements in one of these
three levels based on the lowest level input that is significant to the fair
value measurement in its entirety. These levels are:
Ľ Level
1 Đ inputs are based upon unadjusted quoted prices for identical
instruments traded in active markets. Our Level 1 non-derivative investments
primarily include U.S. government securities, domestic and international
equities, and actively traded mutual funds. Our Level 1 derivative assets
and liabilities include those actively traded on exchanges.
Ľ Level
2 Đ inputs are based upon quoted prices for similar instruments in active
markets, quoted prices for identical or similar instruments in markets that are
not active, and model-based valuation techniques (e.g. the Black-Scholes model)
for which all significant inputs are observable in the market or can be
corroborated by observable market data for substantially the full term of the
assets or liabilities. Where applicable, these models project future cash flows
and discount the future amounts to a present value using market-based
observable inputs including interest rate curves, credit spreads, foreign
exchange rates, and forward and spot prices for currencies and commodities. Our
Level 2 non-derivative investments consist primarily of corporate notes and
bonds, common and preferred stock, mortgage- and asset-backed securities, U.S.
government and agency securities, and foreign government bonds. Our Level 2
derivative assets and liabilities primarily include certain over-the-counter
option and swap contracts.
Ľ Level
3 Đ inputs are generally unobservable and typically reflect managementŐs
estimates of assumptions that market participants would use in pricing the
asset or liability. The fair values are therefore determined using model-based
techniques, including option pricing models and discounted cash flow models.
Our Level 3 non-derivative assets primarily comprise investments in common and
preferred stock and goodwill when it is recorded at fair value due to an
impairment charge. Unobservable inputs used in the models are significant
to the fair values of the assets and liabilities. Our Level 3 derivative assets
and liabilities primarily include equity derivatives.
We
measure certain assets, including our cost and equity method investments, at
fair value on a nonrecurring basis when they are deemed to be
other-than-temporarily impaired. The fair values of these investments are
determined based on valuation techniques using the best information available,
and may include quoted market prices, market comparables, and discounted cash
flow projections. An impairment charge is recorded when the cost of the
investment exceeds its fair value and this condition is determined to be
other-than-temporary.
Our
other current financial assets and our current financial liabilities have fair
values that approximate their carrying values.
Financial Instruments
We
consider all highly liquid interest-earning investments with a maturity of
three months or less at the date of purchase to be cash equivalents. The fair
values of these investments approximate their carrying values. In general,
investments with original maturities of greater than three months and remaining
maturities of less than one year are classified as short-term investments.
Investments with maturities beyond one year may be classified as short-term
based on their highly liquid nature and because such marketable securities
represent the investment of cash that is available for current operations. All
cash equivalents and short-term investments are classified as available-for-sale
and realized gains and losses are recorded using the specific identification
method. Changes in market value, excluding other-than-temporary impairments,
are reflected in OCI.
Equity
and other investments classified as long-term include both debt and equity
instruments. With the exception of certain corporate notes that are classified
as held-to-maturity, debt and publicly-traded equity securities are classified
as available-for-sale and realized gains and losses are recorded using the
specific identification method. Changes in the market value of
available-for-sale securities, excluding other-than-temporary impairments, are
reflected in OCI. Held-to-maturity investments are recorded and held at
amortized cost. Common and preferred stock and other investments that are
restricted for more than one year or are not publicly traded are recorded at
cost or using the equity method.
We
lend certain fixed-income and equity securities to increase investment returns.
The loaned securities continue to be carried as investments on our balance
sheet. Cash and/or security interests are received as collateral for the loaned
securities with the amount determined based upon the underlying security lent
and the creditworthiness of the borrower. Cash received is recorded as an asset
with a corresponding liability.
Investments
are considered to be impaired when a decline in fair value is judged to be
other-than-temporary. Fair value is calculated based on publicly available
market information or other estimates determined by management. We employ a
systematic methodology on a quarterly basis that considers available
quantitative and qualitative evidence in evaluating potential impairment of our
investments. If the cost of an investment exceeds its fair value, we evaluate,
among other factors, general market conditions, credit quality of debt
instrument issuers, the duration and extent to which the fair value is less
than cost, and for equity securities, our intent and ability to hold, or plans
to sell, the investment. For fixed-income securities, we also evaluate whether
we have plans to sell the security or it is more likely than not that we will
be required to sell the security before recovery. We also consider specific
adverse conditions related to the financial health of and business outlook for
the investee, including industry and sector performance, changes in technology,
and operational and financing cash flow factors. Once a decline in fair value
is determined to be other-than-temporary, an impairment charge is recorded to
other income (expense), net and a new cost basis in the investment is
established.
Derivative
instruments are recognized as either assets or liabilities and are measured at
fair value. The accounting for changes in the fair value of a derivative depends
on the intended use of the derivative and the resulting designation.
For
derivative instruments designated as fair value hedges, the gains (losses) are
recognized in earnings in the periods of change together with the offsetting
losses (gains) on the hedged items attributed to the risk being hedged. For
options designated as fair value hedges, changes in the time value are excluded
from the assessment of hedge effectiveness and are recognized in earnings.
For
derivative instruments designated as cash-flow hedges, the effective portion of
the gains (losses) on the derivatives is initially reported as a component of
OCI and is subsequently recognized in earnings when the hedged exposure is
recognized in earnings. For options designated as cash-flow hedges, changes in
the time value are excluded from the assessment of hedge effectiveness and are
recognized in earnings. Gains (losses) on derivatives representing either hedge
components excluded from the assessment of effectiveness or hedge ineffectiveness
are recognized in earnings.
For
derivative instruments that are not designated as hedges, gains (losses) from
changes in fair values are primarily recognized in other income (expense), net.
Other than those derivatives entered into for investment purposes, such as
commodity contracts, the gains (losses) are generally economically offset by
unrealized gains (losses) in the underlying available-for-sale securities,
which are recorded as a component of OCI until the securities are sold or
other-than-temporarily impaired, at which time the amounts are reclassified
from accumulated other comprehensive income (ŇAOCIÓ) into other income
(expense), net.
Allowance for Doubtful
Accounts
The allowance for doubtful accounts reflects our
best estimate of probable losses inherent in the accounts receivable balance.
We determine the allowance based on known troubled accounts, historical
experience, and other currently available evidence. Activity in the allowance
for doubtful accounts was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
|||
|
|
|
|||||||||||
|
|
|
|
|
|||||||||
|
Year Ended June 30, |
|
2015 |
|
|
2014 |
|
|
2013 |
|
|||
|
|
|
|
|
|||||||||
|
Balance, beginning of period |
|
$ |
301 |
|
|
$ |
336 |
|
|
$ |
389 |
|
|
Charged to costs and other |
|
|
77 |
|
|
|
16 |
|
|
|
4 |
|
|
Write-offs |
|
|
(43 |
) |
|
|
(51 |
) |
|
|
(57 |
) |
|
|
|
|
|
|
|
|
|
|
|
|||
|
Balance, end of period |
|
$ |
335 |
|
|
$ |
301 |
|
|
$ |
336 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
Inventories
are stated at average cost, subject to the lower of cost or market. Cost
includes materials, labor, and manufacturing overhead related to the purchase
and production of inventories. We regularly review inventory quantities on
hand, future purchase commitments with our suppliers, and the estimated utility
of our inventory. If our review indicates a reduction in utility below carrying
value, we reduce our inventory to a new cost basis through a charge to cost of
revenue. The determination of market
value and the estimated volume of demand used in the lower of cost or market
analysis require significant judgment.
Property and Equipment
Property
and equipment is stated at cost and depreciated using the straight-line method
over the shorter of the estimated useful life of the asset or the lease term.
The estimated useful lives of our property and equipment are generally as
follows: computer software developed or acquired for internal use, three to
seven years; computer equipment, two to three years; buildings and
improvements, five to 15 years; leasehold improvements, three to 20 years; and
furniture and equipment, one to 10 years. Land is not depreciated.
Goodwill
Goodwill
is tested for impairment at the reporting unit level (operating segment or one
level below an operating segment) on an annual basis (May 1 for us) and between
annual tests if an event occurs or circumstances change that would more likely
than not reduce the fair value of a reporting unit below its carrying value.
Intangible Assets
All
of our intangible assets are subject to amortization and are amortized using
the straight-line method over their estimated period of benefit, ranging from
one to 15 years. We evaluate the recoverability of intangible assets
periodically by taking into account events or circumstances that may warrant
revised estimates of useful lives or that indicate the asset may be impaired.
Recent Accounting Guidance Not Yet Adopted
In
May 2014, as part of its ongoing efforts to assist in the convergence of U.S.
GAAP and International Financial Reporting Standards, the Financial Accounting
Standards Board (ŇFASBÓ) issued a new standard related to revenue recognition.
Under the new standard, recognition of revenue occurs when a customer obtains
control of promised goods or services in an amount that reflects the
consideration which the entity expects to receive in exchange for those goods
or services. In addition, the standard requires disclosure of the nature,
amount, timing, and uncertainty of revenue and cash flows arising from
contracts with customers. The new standard will be effective for us beginning
July 1, 2018, and adoption as of the original effective date of July 1,
2017 is permitted. We anticipate this standard will have a material impact on
our consolidated financial statements, and we are currently evaluating its
impact.
NOTE 2 Ń EARNINGS PER SHARE
Basic earnings per share (ŇEPSÓ) is computed based
on the weighted average number of shares of common stock outstanding during the
period. Diluted EPS is computed based on the weighted average number of shares
of common stock plus the effect of dilutive potential common shares outstanding
during the period using the treasury stock method. Dilutive potential common
shares include outstanding stock options and stock awards.
The components of basic and diluted EPS were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except earnings per share) |
|
|
|
|
|
|
|
|
|
|||
|
|
|
|||||||||||
|
|
|
|
|
|||||||||
|
Year Ended June 30, |
|
2015 |
|
|
2014 |
|
|
2013 |
|
|||
|
|
|
|
|
|||||||||
|
Net income available for
common shareholders (A) |
|
$ |
12,193 |
|
|
$ |
22,074 |
|
|
$ |
21,863 |
|
|
|
|
|
|
|||||||||
|
Weighted average
outstanding shares of common stock (B) |
|
|
8,177 |
|
|
|
8,299 |
|
|
|
8,375 |
|
|
Dilutive effect of
stock-based awards |
|
|
77 |
|
|
|
100 |
|
|
|
95 |
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Common stock and common stock
equivalents (C) |
|
|
8,254 |
|
|
|
8,399 |
|
|
|
8,470 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
Earnings Per Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
Basic (A/B) |
|
$ |
1.49 |
|
|
$ |
2.66 |
|
|
$ |
2.61 |
|
|
Diluted (A/C) |
|
$ |
1.48 |
|
|
$ |
2.63 |
|
|
$ |
2.58 |
|
|
|
|
|||||||||||
Anti-dilutive
stock-based awards excluded from the calculations of diluted EPS were
immaterial during the periods presented.
NOTE 3 Ń OTHER INCOME (EXPENSE), NET
The components of other income (expense), net were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
|||
|
|
|
|||||||||||
|
|
|
|
|
|||||||||
|
Year Ended June 30, |
|
2015 |
|
|
2014 |
|
|
2013 |
|
|||
|
|
|
|
|
|||||||||
|
Dividends and interest
income |
|
$ |
766 |
|
|
$ |
883 |
|
|
$ |
677 |
|
|
Interest expense |
|
|
(781 |
) |
|
|
(597 |
) |
|
|
(429 |
) |
|
Net recognized gains on
investments |
|
|
716 |
|
|
|
437 |
|
|
|
116 |
|
|
Net losses on derivatives |
|
|
(423 |
) |
|
|
(328 |
) |
|
|
(196 |
) |
|
Net gains (losses) on foreign currency remeasurements |
|
|
335 |
|
|
|
(165 |
) |
|
|
(74 |
) |
|
Other |
|
|
(267 |
) |
|
|
(169 |
) |
|
|
194 |
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total |
|
$ |
346 |
|
|
$ |
61 |
|
|
$ |
288 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Following are details of net recognized gains on
investments during the periods reported:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
|||
|
|
|
|||||||||||
|
|
|
|
|
|||||||||
|
Year Ended June 30, |
|
2015 |
|
|
2014 |
|
|
2013 |
|
|||
|
|
|
|
|
|||||||||
|
Other-than-temporary impairments of
investments |
|
$ |
(183 |
) |
|
$ |
(106 |
) |
|
$ |
(208 |
) |
|
Realized gains from sales of
available-for-sale securities |
|
|
1,176 |
|
|
|
776 |
|
|
|
489 |
|
|
Realized losses from sales of
available-for-sale securities |
|
|
(277 |
) |
|
|
(233 |
) |
|
|
(165 |
) |
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total |
|
$ |
716 |
|
|
$ |
437 |
|
|
$ |
116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 4 Ń INVESTMENTS
Investment
Components
The components
of investments, including associated derivatives, but excluding
held-to-maturity investments, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
Cost Basis |
|
|
Unrealized Gains |
|
|
Unrealized Losses |
|
|
Recorded Basis |
|
|
Cash and Cash Equivalents |
|
|
Short-term Investments |
|
|
Equity and Other Investments |
|
|||||||
|
|
|
|||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
|
June 30, 2015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
|
Cash |
|
$ |
3,679 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
3,679 |
|
|
$ |
3,679 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
Mutual funds |
|
|
1,100 |
|
|
|
0 |
|
|
|
0 |
|
|
|
1,100 |
|
|
|
1,100 |
|
|
|
0 |
|
|
|
0 |
|
|
Commercial paper |
|
|
1 |
|
|
|
0 |
|
|
|
0 |
|
|
|
1 |
|
|
|
1 |
|
|
|
0 |
|
|
|
0 |
|
|
Certificates of deposit |
|
|
906 |
|
|
|
0 |
|
|
|
0 |
|
|
|
906 |
|
|
|
776 |
|
|
|
130 |
|
|
|
0 |
|
|
U.S. government and agency securities |
|
|
72,843 |
|
|
|
76 |
|
|
|
(30 |
) |
|
|
72,889 |
|
|
|
39 |
|
|
|
72,850 |
|
|
|
0 |
|
|
Foreign government bonds |
|
|
5,477 |
|
|
|
3 |
|
|
|
(24 |
) |
|
|
5,456 |
|
|
|
0 |
|
|
|
5,456 |
|
|
|
0 |
|
|
Mortgage- and asset-backed securities |
|
|
4,899 |
|
|
|
23 |
|
|
|
(6 |
) |
|
|
4,916 |
|
|
|
0 |
|
|
|
4,916 |
|
|
|
0 |
|
|
Corporate notes and bonds |
|
|
7,192 |
|
|
|
97 |
|
|
|
(37 |
) |
|
|
7,252 |
|
|
|
0 |
|
|
|
7,252 |
|
|
|
0 |
|
|
Municipal securities |
|
|
285 |
|
|
|
35 |
|
|
|
(1 |
) |
|
|
319 |
|
|
|
0 |
|
|
|
319 |
|
|
|
0 |
|
|
Common and preferred stock |
|
|
6,668 |
|
|
|
4,986 |
|
|
|
(215 |
) |
|
|
11,439 |
|
|
|
0 |
|
|
|
0 |
|
|
|
11,439 |
|
|
Other investments |
|
|
597 |
|
|
|
0 |
|
|
|
0 |
|
|
|
597 |
|
|
|
0 |
|
|
|
8 |
|
|
|
589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total |
|
$ |
103,647 |
|
|
$ |
5,220 |
|
|
$ |
(313 |
) |
|
$ |
108,554 |
|
|
$ |
5,595 |
|
|
$ |
90,931 |
|
|
$ |
12,028 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
Cost Basis |
|
|
Unrealized Gains |
|
|
Unrealized Losses |
|
|
Recorded Basis |
|
|
Cash and Cash Equivalents |
|
|
Short-term Investments |
|
|
Equity and Other Investments |
|
|||||||
|
|
|
|||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
|
June 30, 2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
|
Cash |
|
$ |
4,980 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
4,980 |
|
|
$ |
4,980 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
Mutual funds |
|
|
590 |
|
|
|
0 |
|
|
|
0 |
|
|
|
590 |
|
|
|
590 |
|
|
|
0 |
|
|
|
0 |
|
|
Commercial paper |
|
|
189 |
|
|
|
0 |
|
|
|
0 |
|
|
|
189 |
|
|
|
89 |
|
|
|
100 |
|
|
|
0 |
|
|
Certificates of deposit |
|
|
1,197 |
|
|
|
0 |
|
|
|
0 |
|
|
|
1,197 |
|
|
|
865 |
|
|
|
332 |
|
|
|
0 |
|
|
U.S. government and
agency securities |
|
|
66,952 |
|
|
|
103 |
|
|
|
(29 |
) |
|
|
67,026 |
|
|
|
109 |
|
|
|
66,917 |
|
|
|
0 |
|
|
Foreign government bonds |
|
|
3,328 |
|
|
|
17 |
|
|
|
(10 |
) |
|
|
3,335 |
|
|
|
2,027 |
|
|
|
1,308 |
|
|
|
0 |
|
|
Mortgage- and
asset-backed securities |
|
|
991 |
|
|
|
30 |
|
|
|
(2 |
) |
|
|
1,019 |
|
|
|
0 |
|
|
|
1,019 |
|
|
|
0 |
|
|
Corporate notes and bonds |
|
|
6,845 |
|
|
|
191 |
|
|
|
(9 |
) |
|
|
7,027 |
|
|
|
9 |
|
|
|
7,018 |
|
|
|
0 |
|
|
Municipal securities |
|
|
287 |
|
|
|
45 |
|
|
|
0 |
|
|
|
332 |
|
|
|
0 |
|
|
|
332 |
|
|
|
0 |
|
|
Common and preferred
stock |
|
|
6,785 |
|
|
|
5,207 |
|
|
|
(81 |
) |
|
|
11,911 |
|
|
|
0 |
|
|
|
0 |
|
|
|
11,911 |
|
|
Other investments |
|
|
1,164 |
|
|
|
0 |
|
|
|
0 |
|
|
|
1,164 |
|
|
|
0 |
|
|
|
14 |
|
|
|
1,150 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total |
|
$ |
93,308 |
|
|
$ |
5,593 |
|
|
$ |
(131 |
) |
|
$ |
98,770 |
|
|
$ |
8,669 |
|
|
$ |
77,040 |
|
|
$ |
13,061 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In
addition to the investments in the table above, we also own corporate notes
that are classified as held-to-maturity investments, which are included in
equity and other investments on the balance sheet. These corporate notes
are due October 31, 2023 and are measured at fair value on a nonrecurring
basis. As of June 30, 2015, the amortized cost and recorded basis of these
corporate notes were both $25 million with an estimated fair value that
approximates the carrying value. As of June 30, 2014, the amortized cost,
recorded basis, and estimated fair value of these corporate notes was $1.5
billion, $1.5 billion, and $1.7 billion, respectively, while their associated
gross unrealized holding gains were $164 million.
As
of June 30, 2015 and 2014, the recorded bases of common and preferred stock
that are restricted for more than one year or are not publicly traded were $561
million and $520 million, respectively. These investments are carried at cost
and are reviewed quarterly for indicators of other-than-temporary impairment.
It is not practicable for us to reliably estimate the fair value of these
investments.
We
lend certain fixed-income and equity securities to increase investment returns.
These transactions are accounted for as secured borrowings and the loaned
securities continue to be carried as investments on our balance sheet. Cash
and/or security interests are received as collateral for the loaned securities
with the amount determined based upon the underlying security lent and the
creditworthiness of the borrower. As of June 30, 2015, the collateral received
under these agreements totaled $92 million which is comprised of $79 million of
certificates of deposit and $13 million of U.S. government and agency
securities. The contractual maturities of these agreements are primarily on a
continuous and overnight basis.
Unrealized Losses on Investments
Investments with continuous unrealized losses for
less than 12 months and 12 months or greater and their related fair values were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months |
|
|
12 Months or Greater |
|
|
|
|
|
Total |
|
||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
(In millions) |
|
Fair Value |
|
|
Unrealized |
|
|
Fair Value |
|
|
Unrealized |
|
|
Total |
|
|
||||||||
|
|
|
|||||||||||||||||||||||
|
|
|
|
|
|
|
|
||||||||||||||||||
|
June 30, 2015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||
|
U.S. government and
agency securities |
|
$ |
6,636 |
|
|
$ |
(9 |
) |
|
$ |
421 |
|
|
$ |
(21 |
) |
|
$ |
7,057 |
|
|
$ |
(30 |
) |
|
Foreign government bonds |
|
|
4,611 |
|
|
|
(12 |
) |
|
|
18 |
|
|
|
(12 |
) |
|
|
4,629 |
|
|
|
(24 |
) |
|
Mortgage- and
asset-backed securities |
|
|
3,171 |
|
|
$ |
(5 |
) |
|
|
28 |
|
|
|
(1 |
) |
|
|
3,199 |
|
|
|
(6 |
) |
|
Corporate notes and bonds |
|
|
2,946 |
|
|
|
(29 |
) |
|
|
104 |
|
|
|
(8 |
) |
|
|
3,050 |
|
|
|
(37 |
) |
|
Municipal securities |
|
|
36 |
|
|
|
(1 |
) |
|
|
0 |
|
|
|
0 |
|
|
|
36 |
|
|
|
(1 |
) |
|
Common and preferred stock |
|
|
1,389 |
|
|
|
(180 |
) |
|
|
148 |
|
|
|
(35 |
) |
|
|
1,537 |
|
|
|
(215 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total |
|
$ |
18,789 |
|
|
$ |
(236 |
) |
|
$ |
719 |
|
|
$ |
(77 |
) |
|
$ |
19,508 |
|
|
$ |
(313 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months |
|
|
12 Months or Greater |
|
|
|
|
|
Total |
|
||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
(In millions) |
|
Fair Value |
|
|
Unrealized |
|
|
Fair Value |
|
|
Unrealized |
|
|
Total |
|
|
||||||||
|
|
|
|||||||||||||||||||||||
|
|
|
|
|
|
|
|
||||||||||||||||||
|
June 30, 2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||
|
U.S. government and agency securities |
|
$ |
4,161 |
|
|
$ |
(29 |
) |
|
$ |
850 |
|
|
$ |
0 |
|
|
$ |
5,011 |
|
|
$ |
(29 |
) |
|
Foreign government bonds |
|
|
566 |
|
|
|
(4 |
) |
|
|
21 |
|
|
|
(6 |
) |
|
|
587 |
|
|
|
(10 |
) |
|
Mortgage- and asset-backed securities |
|
|
120 |
|
|
|
0 |
|
|
|
61 |
|
|
|
(2 |
) |
|
|
181 |
|
|
|
(2 |
) |
|
Corporate notes and bonds |
|
|
1,154 |
|
|
|
(8 |
) |
|
|
34 |
|
|
|
(1 |
) |
|
|
1,188 |
|
|
|
(9 |
) |
|
Common and preferred stock |
|
|
463 |
|
|
|
(48 |
) |
|
|
257 |
|
|
|
(33 |
) |
|
|
720 |
|
|
|
(81 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total |
|
$ |
6,464 |
|
|
$ |
(89 |
) |
|
$ |
1,223 |
|
|
$ |
(42 |
) |
|
$ |
7,687 |
|
|
$ |
(131 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
losses from fixed-income securities are primarily attributable to changes in
interest rates. Unrealized losses from domestic and international equities are
due to market price movements. Management does not believe any remaining
unrealized losses represent other-than-temporary impairments based on our
evaluation of available evidence as of June 30, 2015.
Debt Investment Maturities
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
Cost Basis |
|
|
Estimated Fair Value |
|
||
|
|
|
|||||||
|
|
|
|
||||||
|
June 30, 2015 |
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Due in one year or less |
|
$ |
53,616 |
|
|
$ |
53,645 |
|
|
Due after one year through five years |
|
|
33,260 |
|
|
|
33,336 |
|
|
Due after five years through 10 years |
|
|
3,180 |
|
|
|
3,161 |
|
|
Due after 10 years |
|
|
1,547 |
|
|
|
1,597 |
|
|
|
|
|
|
|
|
|||
|
Total |
|
$ |
91,603 |
|
|
$ |
91,739 |
|
|
|
|
|
|
|
|
|
|
|
NOTE 5 Ń DERIVATIVES
We
use derivative instruments to manage risks related to foreign currencies,
equity prices, interest rates, and credit; to enhance investment returns; and
to facilitate portfolio diversification. Our objectives for holding derivatives
include reducing, eliminating, and efficiently managing the economic impact of
these exposures as effectively as possible.
Our
derivative programs include strategies that both qualify and do not qualify for
hedge accounting treatment. All notional amounts presented below are measured
in U.S. dollar equivalents.
Foreign Currency
Certain
forecasted transactions, assets, and liabilities are exposed to foreign
currency risk. We monitor our foreign currency exposures daily to maximize the
economic effectiveness of our foreign currency hedge positions. Option and
forward contracts are used to hedge a portion of forecasted international
revenue for up to three years in the future and are designated as cash flow
hedging instruments. Principal currencies hedged include the euro, Japanese
yen, British pound, Canadian dollar, and Australian dollar. As of June 30, 2015
and June 30, 2014, the total notional amounts of these foreign exchange
contracts sold were $9.8 billion and $4.9 billion, respectively.
Foreign currency risks related to certain non-U.S.
dollar denominated securities are hedged using foreign exchange forward
contracts that are designated as fair value hedging instruments. As of June 30,
2015 and June 30, 2014, the total notional amounts of these foreign
exchange contracts sold were $5.3 billion and $3.1 billion, respectively.
Certain
options and forwards not designated as hedging instruments are also used to
manage the variability in foreign exchange rates on certain balance sheet
amounts and to manage other foreign currency exposures. As of June 30,
2015, the total notional amounts of these foreign exchange contracts purchased
and sold were $9.7 billion and $11.0 billion, respectively. As of June 30,
2014, the total notional amounts of these foreign exchange contracts purchased
and sold were $6.2 billion and $8.5 billion, respectively.
Equity
Securities
held in our equity and other investments portfolio are subject to market price
risk. Market price risk is managed relative to broad-based global and
domestic equity indices using certain convertible preferred investments,
options, futures, and swap contracts not designated as hedging instruments.
From time to time, to hedge our price risk, we may use and designate equity
derivatives as hedging instruments, including puts, calls, swaps, and
forwards. As of June 30, 2015, the total notional amounts of equity
contracts purchased and sold for managing market price risk were $2.2 billion
and $2.6 billion, respectively, of which $1.1 billion and $1.4 billion,
respectively, were designated as hedging instruments. As of June 30, 2014,
the total notional amounts of equity contracts purchased and sold for managing
market price risk were $1.9 billion and $1.9 billion, respectively, of which
$362 million and $420 million, respectively, were designated as hedging
instruments.
Interest Rate
Securities
held in our fixed-income portfolio are subject to different interest rate risks
based on their maturities. We manage the average maturity of our fixed-income
portfolio to achieve economic returns that correlate to certain broad-based
fixed-income indices using exchange-traded option and futures contracts and
over-the-counter swap and option contracts, none of which are designated as
hedging instruments. As of June 30, 2015, the total notional amounts of
fixed-interest rate contracts purchased and sold were $1.0 billion and $3.2
billion, respectively. As of June 30, 2014, the total notional amounts of
fixed-interest rate contracts purchased and sold were $1.7 billion and $936
million, respectively.
In
addition, we use ŇTo Be AnnouncedÓ forward purchase commitments of
mortgage-backed assets to gain exposure to agency mortgage-backed
securities. These meet the definition of a derivative instrument in cases
where physical delivery of the assets is not taken at the earliest available
delivery date. As of June 30, 2015 and 2014, the total notional derivative
amounts of mortgage contracts purchased were $812 million and $1.1 billion,
respectively.
Credit
Our
fixed-income portfolio is diversified and consists primarily of
investment-grade securities. We use credit default swap contracts, not
designated as hedging instruments, to manage credit exposures relative to
broad-based indices and to facilitate portfolio diversification. We use credit
default swaps as they are a low-cost method of managing exposure to individual
credit risks or groups of credit risks. As of June 30, 2015, the total notional
amounts of credit contracts purchased and sold were $618 million and $430 million,
respectively. As of June 30, 2014, the total notional amounts of credit
contracts purchased and sold were $550 million and $440 million, respectively.
Commodity
We
use broad-based commodity exposures to enhance portfolio returns and to
facilitate portfolio diversification. We use swaps, futures, and option
contracts, not designated as hedging instruments, to generate and manage
exposures to broad-based commodity indices. We use derivatives on commodities
as they can be low-cost alternatives to the purchase and storage of a variety
of commodities, including, but not limited to, precious metals, energy, and
grain. As of June 30, 2015, the total notional amounts of commodity contracts
purchased and sold were $882 million and $316 million, respectively. As of
June 30, 2014, the total notional amounts of commodity contracts purchased
and sold were $1.4 billion and $408 million, respectively.
Credit-Risk-Related
Contingent Features
Certain
of our counterparty agreements for derivative instruments contain provisions
that require our issued and outstanding long-term unsecured debt to maintain an
investment grade credit rating and require us to maintain minimum liquidity of
$1.0 billion. To the extent we fail to meet these requirements, we will be
required to post collateral, similar to the standard convention related to
over-the-counter derivatives. As of June 30, 2015, our long-term unsecured debt
rating was AAA, and cash investments were in excess of $1.0 billion. As a
result, no collateral was required to be posted.
Fair Values of Derivative Instruments
The following
table presents the fair values of derivative instruments designated as hedging
instruments (Ňdesignated hedge derivativesÓ) and not designated as hedging
instruments (Ňnon-designated hedge derivativesÓ). The fair values exclude the
impact of netting derivative assets and liabilities when a legally enforceable
master netting agreement exists and fair value adjustments related to our own
credit risk and counterparty credit risk:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2015 |
|
|
|
|
June 30, 2014 |
|
||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
|
|
|
|
Assets |
|
|
Liabilities |
|
|
|
|
Assets |
|
|
Liabilities |
|
||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
|
(In millions) |
|
Short-term |
|
|
Other |
|
|
Equity and |
|
|
Other |
|
|
Short-term |
|
|
Other |
|
|
Equity and |
|
|
Other |
|
||||||||||||
|
|
|
|||||||||||||||||||||||||||||||||||
|
Non-designated Hedge Derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||||
|
Foreign exchange contracts |
|
|
|
$ |
17 |
|
|
$ |
167 |
|
|
$ |
0 |
|
|
$ |
(79 |
) |
|
|
|
$ |
10 |
|
|
$ |
39 |
|
|
$ |
0 |
|
|
$ |
(97 |
) |
|
Equity contracts |
|
|
|
|
148 |
|
|
|
0 |
|
|
|
0 |
|
|
|
(18 |
) |
|
|
|
|
177 |
|
|
|
0 |
|
|
|
0 |
|
|
|
(21 |
) |
|
Interest rate contracts |
|
|
|
|
7 |
|
|
|
0 |
|
|
|
0 |
|
|
|
(12 |
) |
|
|
|
|
17 |
|
|
|
0 |
|
|
|
0 |
|
|
|
(12 |
) |
|
Credit contracts |
|
|
|
|
16 |
|
|
|
0 |
|
|
|
0 |
|
|
|
(9 |
) |
|
|
|
|
24 |
|
|
|
0 |
|
|
|
0 |
|
|
|
(13 |
) |
|
Commodity contracts |
|
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
15 |
|
|
|
0 |
|
|
|
0 |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Total |
|
|
|
$ |
188 |
|
|
$ |
167 |
|
|
$ |
0 |
|
|
$ |
(118 |
) |
|
|
|
$ |
243 |
|
|
$ |
39 |
|
|
$ |
0 |
|
|
$ |
(144 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Designated Hedge
Derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||||
|
Foreign exchange contracts |
|
|
|
$ |
56 |
|
|
$ |
552 |
|
|
$ |
0 |
|
|
$ |
(31 |
) |
|
|
|
$ |
1 |
|
|
$ |
70 |
|
|
$ |
0 |
|
|
$ |
(15 |
) |
|
Equity contracts |
|
|
|
|
0 |
|
|
|
0 |
|
|
|
25 |
|
|
|
(69 |
) |
|
|
|
|
0 |
|
|
|
0 |
|
|
|
7 |
|
|
|
(125 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Total |
|
|
|
$ |
56 |
|
|
$ |
552 |
|
|
$ |
25 |
|
|
$ |
(100 |
) |
|
|
|
$ |
1 |
|
|
$ |
70 |
|
|
$ |
7 |
|
|
$ |
(140 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Total gross amounts of derivatives |
|
|
|
$ |
244 |
|
|
$ |
719 |
|
|
$ |
25 |
|
|
$ |
(218 |
) |
|
|
|
$ |
244 |
|
|
$ |
109 |
|
|
$ |
7 |
|
|
$ |
(284 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Gross derivatives either offset or subject to an enforceable master
netting agreement |
|
|
|
$ |
126 |
|
|
$ |
719 |
|
|
$ |
25 |
|
|
$ |
(218 |
) |
|
|
|
$ |
99 |
|
|
$ |
109 |
|
|
$ |
7 |
|
|
$ |
(284 |
) |
|
Gross amounts of derivatives offset in the balance sheet |
|
|
|
|
(66 |
) |
|
|
(71 |
) |
|
|
(25 |
) |
|
|
161 |
|
|
|
|
|
(77 |
) |
|
|
(71 |
) |
|
|
(7 |
) |
|
|
155 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Net amounts presented in the balance sheet |
|
|
|
|
60 |
|
|
|
648 |
|
|
|
0 |
|
|
|
(57 |
) |
|
|
|
|
22 |
|
|
|
38 |
|
|
|
0 |
|
|
|
(129 |
) |
|
Gross amounts of derivatives not offset in the balance sheet |
|
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
Cash collateral received |
|
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
(456 |
) |
|
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Net amount |
|
|
|
$ |
60 |
|
|
$ |
648 |
|
|
$ |
0 |
|
|
$ |
(513 |
) |
|
|
|
$ |
22 |
|
|
$ |
38 |
|
|
$ |
0 |
|
|
$ |
(129 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
See also Note 4 Đ
Investments and Note 6 Đ Fair Value Measurements.
Fair Value Hedge Gains (Losses)
We recognized
in other income (expense), net the following gains (losses) on contracts
designated as fair value hedges and their related hedged items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
|||
|
|
|
|||||||||||
|
|
|
|
|
|||||||||
|
Year Ended June 30, |
|
2015 |
|
|
2014 |
|
|
2013 |
|
|||
|
|
|
|
|
|||||||||
|
Foreign Exchange Contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
Derivatives |
|
$ |
741 |
|
|
$ |
(14 |
) |
|
$ |
70 |
|
|
Hedged items |
|
$ |
(725 |
) |
|
|
6 |
|
|
|
(69 |
) |
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total amount of ineffectiveness |
|
$ |
16 |
|
|
$ |
(8 |
) |
|
$ |
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
Equity Contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
Derivatives |
|
$ |
(107 |
) |
|
$ |
(110 |
) |
|
$ |
0 |
|
|
Hedged items |
|
|
107 |
|
|
|
110 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total amount of ineffectiveness |
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of equity contracts excluded from effectiveness assessment |
|
$ |
0 |
|
|
$ |
(9 |
) |
|
$ |
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|||
Cash Flow Hedge Gains (Losses)
We recognized the following gains (losses) on
foreign exchange contracts designated as cash flow hedges (our only cash flow
hedges during the periods presented):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
|||
|
|
|
|||||||||||
|
|
|
|
|
|||||||||
|
Year Ended June 30, |
|
2015 |
|
|
2014 |
|
|
2013 |
|
|||
|
|
|
|
|
|||||||||
|
Effective Portion |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
Gains recognized in OCI (net of tax
effects of $35, $2 and $54) |
|
$ |
1,152 |
|
|
$ |
63 |
|
|
$ |
101 |
|
|
Gains reclassified from AOCI into revenue |
|
$ |
608 |
|
|
$ |
104 |
|
|
$ |
195 |
|
|
|
|
|
|
|||||||||
|
Amount Excluded from Effectiveness
Assessment and Ineffective Portion |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
Losses recognized in other income
(expense), net |
|
$ |
(346 |
) |
|
$ |
(239 |
) |
|
$ |
(168 |
) |
|
|
|
|||||||||||
We
estimate that $492 million of net derivative gains included in AOCI at June 30,
2015 will be reclassified into earnings within the following 12 months. No
significant amounts of gains (losses) were reclassified from AOCI into earnings
as a result of forecasted transactions that failed to occur during fiscal year
2015.
Non-Designated Derivative Gains (Losses)
Gains (losses)
from changes in fair values of derivatives that are not designated as hedges
are primarily recognized in other income (expense), net. These amounts are shown
in the table below, with the exception of gains (losses) on derivatives
presented in income statement line items other than other income (expense), net,
which were immaterial for the periods presented. Other than those derivatives
entered into for investment purposes, such as commodity contracts, the gains
(losses) below are generally economically offset by unrealized gains (losses)
in the underlying available-for-sale securities and gains (losses) from foreign
exchange rate changes on certain balance sheet amounts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
|||
|
|
|
|||||||||||
|
|
|
|
|
|||||||||
|
Year Ended June 30, |
|
2015 |
|
|
2014 |
|
|
2013 |
|
|||
|
|
|
|
|
|||||||||
|
Foreign exchange contracts |
|
$ |
(483 |
) |
|
$ |
(78 |
) |
|
$ |
18 |
|
|
Equity contracts |
|
|
(19 |
) |
|
|
(64 |
) |
|
|
16 |
|
|
Interest-rate contracts |
|
|
23 |
|
|
|
24 |
|
|
|
(11 |
) |
|
Credit contracts |
|
|
(1 |
) |
|
|
13 |
|
|
|
(3 |
) |
|
Commodity contracts |
|
|
(223 |
) |
|
|
71 |
|
|
|
(42 |
) |
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total |
|
$ |
(703 |
) |
|
$ |
(34 |
) |
|
$ |
(22 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 6 Ń FAIR VALUE MEASUREMENTS
Assets and Liabilities Measured at Fair Value on a
Recurring Basis
The following tables present the fair value of our
financial instruments that are measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
millions) |
|
|
Level 1 |
|
|
|
Level 2 |
|
|
|
Level 3 |
|
|
|
Gross Fair Value |
|
|
|
Netting |
(a) |
|
|
Net Fair |
|
|
|
|
|||||||||||||||||||||||
|
|
|
|
|
|
|
|
||||||||||||||||||
|
June 30, 2015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
|
|
|
|
|
|
|
||||||||||||||||||
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||
|
Mutual funds |
|
$ |
1,100 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
1,100 |
|
|
$ |
0 |
|
|
$ |
1,100 |
|
|
Commercial paper |
|
|
0 |
|
|
|
1 |
|
|
|
0 |
|
|
|
1 |
|
|
|
0 |
|
|
|
1 |
|
|
Certificates of deposit |
|
|
0 |
|
|
|
906 |
|
|
|
0 |
|
|
|
906 |
|
|
|
0 |
|
|
|
906 |
|
|
U.S. government and agency securities |
|
|
71,930 |
|
|
|
955 |
|
|
|
0 |
|
|
|
72,885 |
|
|
|
0 |
|
|
|
72,885 |
|
|
Foreign government bonds |
|
|
131 |
|
|
|
5,299 |
|
|
|
0 |
|
|
|
5,430 |
|
|
|
0 |
|
|
|
5,430 |
|
|
Mortgage- and asset-backed securities |
|
|
0 |
|
|
|
4,917 |
|
|
|
0 |
|
|
|
4,917 |
|
|
|
0 |
|
|
|
4,917 |
|
|
Corporate notes and bonds |
|
|
0 |
|
|
|
7,108 |
|
|
|
1 |
|
|
|
7,109 |
|
|
|
0 |
|
|
|
7,109 |
|
|
Municipal securities |
|
|
0 |
|
|
|
319 |
|
|
|
0 |
|
|
|
319 |
|
|
|
0 |
|
|
|
319 |
|
|
Common and preferred stock |
|
|
8,585 |
|
|
|
2,277 |
|
|
|
14 |
|
|
|
10,876 |
|
|
|
0 |
|
|
|
10,876 |
|
|
Derivatives |
|
|
4 |
|
|
|
979 |
|
|
|
5 |
|
|
|
988 |
|
|
|
(162 |
) |
|
|
826 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total |
|
$ |
81,750 |
|
|
$ |
22,761 |
|
|
$ |
20 |
|
|
$ |
104,531 |
|
|
$ |
(162 |
) |
|
$ |
104,369 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||
|
Derivatives and other |
|
$ |
5 |
|
|
$ |
159 |
|
|
$ |
54 |
|
|
$ |
218 |
|
|
$ |
(161 |
) |
|
$ |
57 |
|
|
|
|
|||||||||||||||||||||||
|
|
|
|
|
|
|
|
||||||||||||||||||
|
(In
millions) |
|
|
Level 1 |
|
|
|
Level 2 |
|
|
|
Level 3 |
|
|
|
Gross Fair Value |
|
|
|
Netting |
(a) |
|
|
Net Fair |
|
|
|
|
|||||||||||||||||||||||
|
|
|
|
|
|
|
|
||||||||||||||||||
|
June 30, 2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
|
|
|
|
|
|
|
||||||||||||||||||
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||
|
Mutual funds |
|
$ |
590 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
590 |
|
|
$ |
0 |
|
|
$ |
590 |
|
|
Commercial paper |
|
|
0 |
|
|
|
189 |
|
|
|
0 |
|
|
|
189 |
|
|
|
0 |
|
|
|
189 |
|
|
Certificates of deposit |
|
|
0 |
|
|
|
1,197 |
|
|
|
0 |
|
|
|
1,197 |
|
|
|
0 |
|
|
|
1,197 |
|
|
U.S. government and agency securities |
|
|
66,288 |
|
|
|
745 |
|
|
|
0 |
|
|
|
67,033 |
|
|
|
0 |
|
|
|
67,033 |
|
|
Foreign government bonds |
|
|
139 |
|
|
|
3,210 |
|
|
|
0 |
|
|
|
3,349 |
|
|
|
0 |
|
|
|
3,349 |
|
|
Mortgage- and asset-backed securities |
|
|
0 |
|
|
|
1,015 |
|
|
|
0 |
|
|
|
1,015 |
|
|
|
0 |
|
|
|
1,015 |
|
|
Corporate notes and bonds |
|
|
0 |
|
|
|
6,863 |
|
|
|
0 |
|
|
|
6,863 |
|
|
|
0 |
|
|
|
6,863 |
|
|
Municipal securities |
|
|
0 |
|
|
|
332 |
|
|
|
0 |
|
|
|
332 |
|
|
|
0 |
|
|
|
332 |
|
|
Common and preferred stock |
|
|
9,552 |
|
|
|
1,825 |
|
|
|
14 |
|
|
|
11,391 |
|
|
|
0 |
|
|
|
11,391 |
|
|
Derivatives |
|
|
5 |
|
|
|
348 |
|
|
|
7 |
|
|
|
360 |
|
|
|
(155 |
) |
|
|
205 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total |
|
$ |
76,574 |
|
|
$ |
15,724 |
|
|
$ |
21 |
|
|
$ |
92,319 |
|
|
$ |
(155 |
) |
|
$ |
92,164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||
|
Derivatives and other |
|
$ |
5 |
|
|
$ |
153 |
|
|
$ |
126 |
|
|
$ |
284 |
|
|
$ |
(155 |
) |
|
$ |
129 |
|
|
|
|
|||||||||||||||||||||||
(a) These
amounts represent the impact of netting derivative assets and derivative
liabilities when a legally enforceable master netting agreement exists and fair
value adjustments related to our own credit risk and counterparty credit risk.
The changes in our Level 3
financial instruments that are measured at fair value on a recurring basis were
immaterial during the periods presented.
The following table reconciles the total ŇNet Fair
ValueÓ of assets above to the balance sheet presentation of these same assets
in Note 4 Đ Investments.
|
|
|
|
|
|
|
|
|
|
|||
|
(In millions) |
|
||||||||||
|
|
|
||||||||||
|
|
|
|
|||||||||
|
June 30, |
|
2015 |
|
|
2014 |
|
|||||
|
|
|
|
|||||||||
|
Net fair value of assets measured at fair
value on a recurring basis |
|
$ |
104,369 |
|
|
$ |
92,164 |
|
|||
|
Cash |
|
|
3,679 |
|
|
|
4,980 |
|
|||
|
Common and preferred stock measured at
fair value on a nonrecurring basis |
|
|
561 |
|
|
|
520 |
|
|||
|
Other investments measured at fair value
on a nonrecurring basis |
|
|
589 |
|
|
|
1,150 |
|
|||
|
Less derivative net assets classified as
other current assets |
|
|
(648 |
) |
|
|
(38 |
) |
|||
|
Other |
|
|
4 |
|
|
|
(6 |
) |
|||
|
|
|
|
|
|
|
||||||
|
Recorded basis of investment
components |
|
$ |
108,554 |
|
|
$ |
98,770 |
|
|||
|
|
|
|
|
|
|
|
|
|
|||
Financial Assets and Liabilities Measured at
Fair Value on a Nonrecurring Basis
During
fiscal year 2015 and 2014, we did not record any material other-than-temporary
impairments on financial assets required to be measured at fair value on a
nonrecurring basis.
NOTE 7 Ń INVENTORIES
The components of inventories were as follows:
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|||||||
|
|
|
|||||||
|
|
|
|
||||||
|
June 30, |
|
2015 |
|
|
2014 |
|
||
|
|
|
|
||||||
|
Raw materials |
|
$ |
1,100 |
|
|
$ |
944 |
|
|
Work in process |
|
|
202 |
|
|
|
266 |
|
|
Finished goods |
|
|
1,600 |
|
|
|
1,450 |
|
|
|
|
|
|
|
|
|||
|
Total |
|
$ |
2,902 |
|
|
$ |
2,660 |
|
|
|
|
|
|
|
|
|
|
|
NOTE 8 Ń PROPERTY AND EQUIPMENT
The components of property and equipment were as
follows:
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|||||||
|
|
|
|||||||
|
|
|
|
||||||
|
June 30, |
|
2015 |
|
|
2014 |
|
||
|
|
|
|
||||||
|
Land |
|
$ |
769 |
|
|
$ |
541 |
|
|
Buildings and improvements |
|
|
10,800 |
|
|
|
8,867 |
|
|
Leasehold improvements |
|
|
3,577 |
|
|
|
3,560 |
|
|
Computer equipment and software |
|
|
13,612 |
|
|
|
11,430 |
|
|
Furniture and equipment |
|
|
3,579 |
|
|
|
3,406 |
|
|
|
|
|
|
|
|
|||
|
Total, at cost |
|
|
32,337 |
|
|
|
27,804 |
|
|
Accumulated depreciation |
|
|
(17,606 |
) |
|
|
(14,793 |
) |
|
|
|
|
|
|
|
|||
|
Total, net |
|
$ |
14,731 |
|
|
$ |
13,011 |
|
|
|
|
|
|
|
|
|
|
|
During
fiscal years 2015, 2014, and 2013, depreciation expense was $4.1 billion, $3.4
billion, and $2.6 billion, respectively.
NOTE 9 Ń BUSINESS COMBINATIONS
Mojang Synergies AB
On
November 6, 2014, we acquired Mojang Synergies AB (ŇMojangÓ), the Swedish
video game developer of the Minecraft gaming franchise, for $2.5 billion in
cash, net of cash acquired. The addition of Minecraft and its community
enhances our gaming portfolio across Windows, Xbox, and other ecosystems besides
our own. Our purchase price allocation is preliminary and subject to revision
as more detailed analyses are completed and additional information about fair
value of assets and liabilities becomes available, including additional
information relating to tax matters and finalization of our valuation of
identified intangible assets.
The
significant classes of assets and liabilities to which we preliminarily
allocated the purchase price were goodwill of $1.8 billion and identifiable
intangible assets of $928 million, primarily marketing-related (trade names).
The goodwill recognized in connection with the acquisition is primarily
attributable to anticipated synergies from future growth, and is not expected
to be deductible for tax purposes. We assigned the goodwill to our Devices and
Consumer (ŇD&CÓ) Other segment. Identifiable intangible assets were
assigned a total weighted-average amortization period of 6.3 years. Mojang has
been included in our consolidated results of operations since the acquisition
date.
NokiaŐs Devices and Services Business
On
April 25, 2014, we acquired substantially all of Nokia CorporationŐs
(ŇNokiaÓ) Devices and Services business (ŇNDSÓ) for a total purchase price of
$9.4 billion, including cash acquired of $1.5 billion (the ŇAcquisitionÓ). The
purchase price consisted primarily of cash of $7.1 billion and NokiaŐs repurchase
of convertible notes of $2.1 billion, which was a non-cash transaction, and
liabilities assumed of $0.2 billion. The Acquisition was expected to accelerate
the growth of our D&C business through faster innovation, synergies, and
unified branding and marketing.
The allocation of the purchase price to goodwill
was completed as of March 31, 2015. The major classes of assets and liabilities
to which we have allocated the purchase price were as follows:
|
|
|
|
|
|
|
(In millions) |
|
|||
|
|
|
|||
|
|
|
|||
|
Cash |
|
$ |
1,506 |
|
|
Accounts receivable (a) |
|
|
754 |
|
|
Inventories |
|
|
544 |
|
|
Other current assets |
|
|
936 |
|
|
Property and equipment |
|
|
981 |
|
|
Intangible assets |
|
|
4,509 |
|
|
Goodwill (b) |
|
|
5,456 |
|
|
Other |
|
|
221 |
|
|
Current liabilities |
|
|
(4,575 |
) |
|
Long-term liabilities |
|
|
(890 |
) |
|
|
|
|||
|
Total purchase price |
|
$ |
9,442 |
|
|
|
|
|
|
|
(a) Gross
accounts receivable was $901 million, of which $147 million was expected to be
uncollectible.
(b) Goodwill
was assigned to our Phone Hardware segment. The goodwill was primarily
attributed to increased synergies that were expected to be achieved from the
integration of NDS.
Following are the details of the purchase price
allocated to the intangible assets acquired:
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
Amount |
|
|
Weighted Average Life |
|
||
|
|
|
|||||||
|
|
|
|
||||||
|
Technology-based |
|
$ |
2,493 |
|
|
|
9 years |
|
|
Contract-based |
|
|
1,500 |
|
|
|
9 years |
|
|
Customer-related |
|
|
359 |
|
|
|
3 years |
|
|
Marketing-related (trade names) |
|
|
157 |
|
|
|
2 years |
|
|
|
|
|
|
|
|
|||
|
Fair value of intangible assets acquired |
|
$ |
4,509 |
|
|
|
8 years |
|
|
|
|
|
|
|
|
|
|
|
During the fourth quarter of fiscal year 2015, we recorded $7.5 billion of goodwill
and asset impairment charges related to our Phone Hardware business. These
costs are included in impairment, integration, and restructuring expenses in our
consolidated income statement. See Note 10 Đ Goodwill and Note 11 Đ Intangible
Assets for additional details.
Our consolidated
income statement for fiscal year 2014 included revenue and operating loss of
$2.0 billion and $692 million, respectively, attributable to NDS since the
Acquisition.
Following are the supplemental consolidated results
of Microsoft Corporation on an unaudited pro forma basis, as if the Acquisition
had been consummated on July 1, 2012:
|
|
|
|
|
|
|
|
|
|
|
(In millions, except per share amounts) |
|
|
|
|
|
|
||
|
|
|
|||||||
|
|
|
|
||||||
|
Year Ended June 30, |
|
2014 |
|
|
2013 |
|
||
|
|
|
|
||||||
|
Revenue |
|
$ |
96,248 |
|
|
$ |
93,243 |
|
|
Net income |
|
$ |
20,234 |
|
|
$ |
20,153 |
|
|
Diluted earnings per
share |
|
$ |
2.41 |
|
|
$ |
2.38 |
|
|
|
|
|
|
|
|
|||
These
pro forma results were based on estimates and assumptions, which we believe are
reasonable. They are not the results that would have been realized had we been
a combined company during the periods presented and are not necessarily
indicative of our consolidated results of operations in future periods. The pro
forma results include adjustments primarily related to purchase accounting
adjustments and the elimination of related party transactions between Microsoft
and NDS. Acquisition costs and other nonrecurring charges incurred are included
in the earliest period presented.
During
the fourth quarter of fiscal year 2014, we incurred $21 million of acquisition
costs associated with the purchase of NDS. Acquisition costs are primarily
comprised of transaction fees and direct acquisition costs, including legal,
finance, consulting, and other professional fees. These costs are included in impairment,
integration, and restructuring expenses on our consolidated income statement
for fiscal year 2014.
Certain
concurrent transactions were recognized separately from the Acquisition. Prior
to the Acquisition, we had joint strategic initiatives with Nokia; this
contractual relationship was terminated in conjunction with the Acquisition. No
gain or loss was recorded upon termination of this agreement, as it was
determined to be at market value. In addition, we agreed to license NokiaŐs
mapping services and will pay Nokia separately for the services provided under
a four-year license as they are rendered.
Yammer
On
July 18, 2012, we acquired Yammer, Inc. (ŇYammerÓ), a leading provider of
enterprise social networks, for $1.1 billion in cash. Yammer added an
enterprise social networking service to MicrosoftŐs portfolio of complementary
cloud-based services. The major classes of assets to which we allocated the
purchase price were goodwill of $937 million and identifiable intangible assets
of $178 million. We assigned the goodwill to Commercial Other under our current
segment structure. Yammer was consolidated into our results of operations
starting on the acquisition date.
Other
During
fiscal year 2015, we completed 15 additional acquisitions for total cash consideration
of $892 million. These entities have been included in our consolidated results
of operations since their respective acquisition dates.
Pro
forma results of operations for Mojang and our other acquisitions during the
current period have not been presented because the effects of these business
combinations, individually and in aggregate, were not material to our
consolidated results of operations.
NOTE 10 Ń GOODWILL
Changes in the carrying amount of goodwill were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
June 30, 2013 |
|
|
Acquisitions |
|
|
Other |
|
|
June 30, 2014 |
|
|
Acquisitions |
|
|
Other |
|
|
June 30, |
|
|||||||
|
|
|
|||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
|
Devices and Consumer |
|
Licensing |
|
$ |
866 |
|
|
$ |
0 |
|
|
$ |
2 |
|
|
$ |
868 |
|
|
$ |
4 |
|
|
$ |
0 |
|
|
$ |
872 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hardware: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computing and Gaming Hardware |
|
|
1,689 |
|
|
|
0 |
|
|
|
9 |
|
|
|
1,698 |
|
|
|
13 |
|
|
|
(36 |
) |
|
|
1,675 |
|
|
|
|
Phone Hardware |
|
|
0 |
|
|
|
5,458 |
(a) |
|
|
(104 |
) |
|
|
5,354 |
|
|
|
0 |
|
|
|
(5,238 |
) |
|
|
116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
Total Devices and Consumer Hardware |
|
|
1,689 |
|
|
|
5,458 |
|
|
|
(95 |
) |
|
|
7,052 |
|
|
|
13 |
|
|
|
(5,274 |
) |
|
|
1,791 |
|
|
|
|
Other |
|
|
738 |
|
|
|
0 |
|
|
|
0 |
|
|
|
738 |
|
|
|
1,772 |
|
|
|
(195 |
) |
|
|
2,315 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
Total Devices and Consumer |
|
|
3,293 |
|
|
|
5,458 |
|
|
|
(93 |
) |
|
|
8,658 |
|
|
|
1,789 |
|
|
|
(5,469 |
) |
|
|
4,978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
Licensing |
|
|
10,051 |
|
|
|
2 |
|
|
|
5 |
|
|
|
10,058 |
|
|
|
77 |
|
|
|
(170 |
) |
|
|
9,965 |
|
|
|
|
Other |
|
|
1,311 |
|
|
|
105 |
|
|
|
(5 |
) |
|
|
1,411 |
|
|
|
589 |
|
|
|
(4 |
) |
|
|
1,996 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
Total Commercial |
|
|
11,362 |
|
|
|
107 |
|
|
|
0 |
|
|
|
11,469 |
|
|
|
666 |
|
|
|
(174 |
) |
|
|
11,961 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Total goodwill |
|
|
|
$ |
14,655 |
|
|
$ |
5,565 |
|
|
$ |
(93 |
) |
|
$ |
20,127 |
|
|
$ |
2,455 |
|
|
$ |
(5,643 |
) |
|
$ |
16,939 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
Goodwill acquired
during fiscal year 2014 related to the acquisition of NDS. See Note 9 Đ Business Combinations for additional
details.
The
measurement periods for the valuation of assets acquired and liabilities
assumed end as soon as information on the facts and circumstances that existed
as of the acquisition dates becomes available, but do not exceed 12 months.
Adjustments in purchase price allocations may require a recasting of the
amounts allocated to goodwill retroactive to the periods in which the acquisitions
occurred.
Any
change in the goodwill amounts resulting from foreign currency translations and
purchase accounting adjustments are presented as ŇOtherÓ in the above table.
Also included in ŇOtherÓ are business dispositions and transfers between
business segments due to reorganizations, as applicable. For fiscal year 2015,
a $5.1 billion goodwill impairment charge was included in ŇOther,Ó as discussed
further below. This goodwill impairment charge was included in impairment,
integration, and restructuring expenses in our consolidated income statement,
and reflected in Corporate and Other in our table of operating income (loss) by
segment group in Note 22 Đ Segment Information and Geographic Data.
Our
accumulated goodwill impairment as of June 30, 2015 and 2014 was $11.3
billion and $6.2 billion, respectively.
Goodwill Impairment
We
test goodwill for impairment annually on May 1 at the reporting unit level,
primarily using a discounted cash flow methodology with a peer-based,
risk-adjusted weighted average cost of capital. We believe use of a discounted
cash flow approach is the most reliable indicator of the fair values of the
businesses.
Upon
completion of the annual testing as of May 1, 2015, Phone Hardware goodwill was
determined to be impaired. In the second half of fiscal year 2015, Phone Hardware did not meet its
sales volume and revenue goals, and the mix of units sold had lower margins
than planned. These results, along with changes in the competitive marketplace
and an evaluation of business priorities, led to a shift in strategic direction
and reduced future revenue and profitability expectations for the business. As
a result of these changes in strategy and expectations, we have forecasted
reductions in unit volume growth rates and lower future cash flows used to
estimate the fair value of the Phone Hardware reporting unit, which resulted in
the determination that an impairment adjustment was required.
Because
our annual test indicated that Phone HardwareŐs carrying value exceeded its
estimated fair value, a second phase of the goodwill impairment test (ŇStep 2Ó)
was performed specific to Phone Hardware. Under Step 2, the fair value of all
Phone Hardware assets and liabilities were estimated, including tangible
assets, existing technology, patent agreements, and contractual arrangements,
for the purpose of deriving an estimate of the implied fair value of goodwill.
The implied fair value of the goodwill was then compared to the recorded
goodwill to determine the amount of the impairment. Assumptions used in
measuring the value of these assets and liabilities included the discount rates
and royalty rates used in valuing the intangible assets, and consideration of the
market environment in valuing the tangible assets.
No
other instances of impairment were identified in our May 1, 2015 test. No
impairment of goodwill was identified as of May 1, 2014.
NOTE 11 Ń INTANGIBLE ASSETS
The components
of intangible assets, all of which are finite-lived, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
Gross |
|
|
Accumulated |
|
|
Net Carrying |
|
|
Gross |
|
|
Accumulated |
|
|
Net Carrying |
|
||||||
|
|
|
|||||||||||||||||||||||
|
|
|
|
|
|
|
|
||||||||||||||||||
|
Year Ended June 30, |
|
|
|
|
|
|
|
2015 |
|
|
|
|
|
|
|
|
2014 |
|
||||||
|
|
|
|
|
|
|
|
||||||||||||||||||
|
Technology-based (a) |
|
$ |
6,187 |
|
|
$ |
(3,410 |
) |
|
$ |
2,777 |
|
|
$ |
6,440 |
|
|
$ |
(2,615 |
) |
|
$ |
3,825 |
|
|
Marketing-related |
|
|
1,974 |
|
|
|
(540 |
) |
|
|
1,434 |
|
|
|
1,518 |
|
|
|
(324 |
) |
|
|
1,194 |
|
|
Contract-based |
|
|
1,344 |
|
|
|
(862 |
) |
|
|
482 |
|
|
|
2,266 |
|
|
|
(716 |
) |
|
|
1,550 |
|
|
Customer-related |
|
|
632 |
|
|
|
(490 |
) |
|
|
142 |
|
|
|
732 |
|
|
|
(320 |
) |
|
|
412 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total |
|
$ |
10,137 |
|
|
$ |
(5,302 |
) |
|
$ |
4,835 |
|
|
$ |
10,956 |
|
|
$ |
(3,975 |
) |
|
$ |
6,981 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) Technology-based
intangible assets included $116 million and $98 million as of June 30, 2015 and
2014, respectively, of net carrying amount of software to be sold, leased, or
otherwise marketed.
We
estimate that we have no significant residual value related to our intangible
assets. During fiscal year 2015, we
recorded impairment charges of $2.2 billion related to our Phone Hardware
intangible assets. In the fourth quarter of fiscal year 2015, we tested the
intangible assets for recoverability due to changes in facts and circumstances
associated with the shift in strategic direction and reduced profitability
expectations for Phone Hardware. Based on the results of our testing, we
determined that the carrying value of the intangible assets was not
recoverable, and an impairment charge was recorded to the extent that estimated
fair value exceeded carrying value. We primarily used a relief from royalty
income approach to determine the fair value of the intangible assets and
determine the amount of impairment. These intangible assets impairment charges
were included
in impairment, integration, and restructuring expenses in our consolidated
income statement, and reflected in Corporate and Other in our table of
operating income (loss) by segment group in Note 22 Đ Segment Information and
Geographic Data. No material impairments of intangible assets were identified
during fiscal year 2014.
The components of intangible assets acquired during
the periods presented were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
Amount |
|
|
Weighted Average Life |
|
|
Amount |
|
|
Weighted Average Life |
|
||||
|
|
|
|||||||||||||||
|
|
|
|
|
|
||||||||||||
|
Year Ended June 30, |
|
2015 |
|
|
|
|
|
2014 |
|
|
|
|
||||
|
|
|
|
|
|
||||||||||||
|
Technology-based |
|
$ |
874 |
|
|
|
5 years |
|
|
$ |
2,841 |
|
|
|
9 years |
|
|
Marketing-related |
|
|
543 |
|
|
|
8 years |
|
|
|
174 |
|
|
|
2 years |
|
|
Contract-based |
|
|
0 |
|
|
|
|
|
|
|
1,500 |
|
|
|
9 years |
|
|
Customer-related |
|
|
37 |
|
|
|
4 years |
|
|
|
363 |
|
|
|
3 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total |
|
$ |
1,454 |
|
|
|
6 years |
|
|
$ |
4,878 |
|
|
|
8 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
table above includes $4.5 billion related to the acquisition of NDS during
fiscal year 2014, of which $2.2 billion was impaired in fiscal year 2015. See
Note 9 Đ Business Combination for additional details.
Intangible
assets amortization expense was $1.3 billion, $845 million, and $739 million
for fiscal years 2015, 2014, and 2013, respectively. Amortization of
capitalized software was $79 million, $200 million, and $210 million for fiscal
years 2015, 2014, and 2013, respectively.
The following table
outlines the estimated future amortization expense related to intangible assets
held at June 30, 2015:
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
|
|||
|
|
|
|||
|
Year Ending June 30, |
|
|
|
|
|
|
|
|||
|
2016 |
|
$ |
910 |
|
|
2017 |
|
|
755 |
|
|
2018 |
|
|
670 |
|
|
2019 |
|
|
554 |
|
|
2020 |
|
|
495 |
|
|
Thereafter |
|
|
1,451 |
|
|
|
|
|||
|
Total |
|
$ |
4,835 |
|
|
|
|
|
|
|
NOTE 12 Ń DEBT
Short-term Debt
As of June 30,
2015, we had $5.0 billion of commercial paper issued and outstanding, with a
weighted-average interest rate of 0.11% and maturities ranging from 8 days to 63
days. As of June 30, 2014, we had $2.0 billion of commercial paper issued
and outstanding, with a weighted-average interest rate of 0.12% and maturities
ranging from 86 to 91 days. The estimated fair value of this commercial paper
approximates its carrying value.
We
have two $5.0 billion credit facilities that expire on November 4, 2015 and November 14,
2018, respectively. These credit facilities serve as a back-up for our
commercial paper program. As of June 30, 2015, we were in compliance with the
only financial covenant in both credit agreements, which requires us to maintain
a coverage ratio of at least three times earnings before interest, taxes,
depreciation, and amortization to interest expense, as defined in the credit
agreements. No amounts were drawn against these credit facilities during any of
the periods presented.
Long-term Debt
As
of June 30, 2015, the total carrying value and estimated fair value of our
long-term debt, including the current portion, were $30.3 billion and $30.5
billion, respectively. This is compared to a carrying value and estimated fair
value of our long-term debt of $20.6 billion and $21.5 billion, respectively,
as of June 30, 2014. These estimated fair values are based on Level 2
inputs.
The components of our long-term debt, including the
current portion, and the associated interest rates were as follows as of June
30, 2015 and 2014:
|
Due Date |
|
|
Face Value June 30, |
|
|
Face Value June 30, |
|
|
Stated Rate |
|
Effective Rate |
|
||||||||
|
|
||||||||||||||||||||
|
|
|
|
(In millions) |
|
|
|
|
|
|
|||||||||||
|
Notes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
September 25, 2015 |
|
|
$ |
1,750 |
|
$ |
1,750 |
|
|
1.625% |
|
1.795% |
||||||||
|
February 8, 2016 |
|
|
|
|
750 |
|
|
750 |
|
|
2.500% |
|
2.642% |
|||||||
|
November 15, 2017 |
|
|
|
|
600 |
|
|
600 |
|
|
0.875% |
|
1.084% |
|||||||
|
May 1, 2018 |
|
|
|
|
450 |
|
|
450 |
|
|
1.000% |
|
1.106% |
|||||||
|
December 6, 2018 |
|
|
|
|
1,250 |
|
|
1,250 |
|
|
1.625% |
|
1.824% |
|||||||
|
June 1, 2019 |
|
|
|
|
1,000 |
|
|
1,000 |
|
|
4.200% |
|
4.379% |
|||||||
|
February 12, 2020 (a) |
|
|
|
|
1,500 |
|
|
0 |
|
|
1.850% |
|
1.935% |
|
||||||
|
October 1, 2020 |
|
|
|
|
1,000 |
|
|
1,000 |
|
|
3.000% |
|
3.137% |
|||||||
|
February 8, 2021 |
|
|
|
|
500 |
|
|
500 |
|
|
4.000% |
|
4.082% |
|||||||
|
December 6, 2021 (b) |
|
|
|
|
1,950 |
|
|
2,396 |
|
|
2.125% |
|
2.233% |
|||||||
|
February 12, 2022 (a) |
|
|
|
|
1,500 |
|
|
0 |
|
|
2.375% |
|
2.466% |
|
||||||
|
November 15, 2022 |
|
|
|
|
750 |
|
|
750 |
|
|
2.125% |
|
2.239% |
|||||||
|
May 1, 2023 |
|
|
|
|
1,000 |
|
|
1,000 |
|
|
2.375% |
|
2.465% |
|||||||
|
December 15, 2023 |
|
|
|
|
1,500 |
|
|
1,500 |
|
|
3.625% |
|
3.726% |
|||||||
|
February 12, 2025 (a) |
|
|
|
|
2,250 |
|
|
0 |
|
|
2.700% |
|
2.772% |
|
||||||
|
December 6, 2028 (b) |
|
|
|
|
1,950 |
|
|
2,396 |
|
|
3.125% |
|
3.218% |
|||||||
|
May 2, 2033 (b) |
|
|
|
|
613 |
|
|
753 |
|
|
2.625% |
|
2.690% |
|||||||
|
February 12, 2035 (a) |
|
|
|
|
1,500 |
|
|
0 |
|
|
3.500% |
|
3.604% |
|
||||||
|
June 1, 2039 |
|
|
|
|
750 |
|
|
750 |
|
|
5.200% |
|
5.240% |
|||||||
|
October 1, 2040 |
|
|
|
|
1,000 |
|
|
1,000 |
|
|
4.500% |
|
4.567% |
|||||||
|
February 8, 2041 |
|
|
|
|
1,000 |
|
|
1,000 |
|
|
5.300% |
|
5.361% |
|||||||
|
November 15, 2042 |
|
|
|
|
900 |
|
|
900 |
|
|
3.500% |
|
3.571% |
|||||||
|
May 1, 2043 |
|
|
|
|
500 |
|
|
500 |
|
|
3.750% |
|
3.829% |
|||||||
|
December 15, 2043 |
|
|
|
|
500 |
|
|
500 |
|
|
4.875% |
|
4.918% |
|||||||
|
February 12, 2045 (a) |
|
|
|
|
1,750 |
|
|
0 |
|
|
3.750% |
|
3.800% |
|
||||||
|
February 12, 2055 (a) |
|
|
|
|
2,250 |
|
|
0 |
|
|
4.000% |
|
4.063% |
|
||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Total |
|
|
|
$ |
30,463 |
|
$ |
20,745 |
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
(a) In
February 2015, we issued $10.8 billion of debt securities.
(b) Euro-denominated
debt securities.
The
notes in the table above are senior unsecured obligations and rank equally with
our other senior unsecured debt outstanding. Interest on these notes is paid
semi-annually, except for the euro-denominated debt securities on which interest
is paid annually. Cash paid for interest on our debt for fiscal years 2015,
2014, and 2013 was $620 million, $509 million, and $371 million, respectively.
As of June 30, 2015 and 2014, the aggregate unamortized discount for our
long-term debt, including the current portion, was $156 million and $100
million, respectively.
Debt Service
Maturities of
our long-term debt for each of the next five years and thereafter are as
follows:
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
|
|||
|
|
|
|||
|
Year Ending June 30, |
|
|
|
|
|
|
|
|||
|
2016 |
|
$ |
2,500 |
|
|
2017 |
|
|
0 |
|
|
2018 |
|
|
1,050 |
|
|
2019 |
|
|
2.250 |
|
|
2020 |
|
|
1,500 |
|
|
Thereafter |
|
|
23,163 |
|
|
|
|
|||
|
Total |
|
$ |
30,463 |
|
|
|
|
|
|
|
NOTE 13 Ń INCOME TAXES
The components of the provision for income taxes
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|||||||||||
|
|
|
|||||||||||
|
|
|
|
|
|||||||||
|
Year Ended June 30, |
|
2015 |
|
|
2014 |
|
|
2013 |
|
|||
|
|
|
|
|
|||||||||
|
Current Taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
U.S. federal |
|
$ |
3,661 |
|
|
$ |
3,738 |
|
|
$ |
3,131 |
|
|
U.S. state and local |
|
|
364 |
|
|
|
266 |
|
|
|
332 |
|
|
Foreign |
|
|
2,065 |
|
|
|
2,073 |
|
|
|
1,745 |
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Current taxes |
|
|
6,090 |
|
|
|
6,077 |
|
|
|
5,208 |
|
|
|
|
|
|
|||||||||
|
Deferred Taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
Deferred taxes |
|
|
224 |
|
|
|
(331 |
) |
|
|
(19 |
) |
|
|
|
|
|
|
|
|
|
|
|
|||
|
Provision for income taxes |
|
$ |
6,314 |
|
|
$ |
5,746 |
|
|
$ |
5,189 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. and foreign components
of income before income taxes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|||||||||||
|
|
|
|||||||||||
|
|
|
|
|
|||||||||
|
Year Ended June 30, |
|
2015 |
|
|
2014 |
|
|
2013 |
|
|||
|
|
|
|
|
|||||||||
|
U.S. |
|
$ |
7,363 |
|
|
$ |
7,127 |
|
|
$ |
6,674 |
|
|
Foreign |
|
|
11,144 |
|
|
|
20,693 |
|
|
|
20,378 |
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Income before income taxes |
|
$ |
18,507 |
|
|
$ |
27,820 |
|
|
$ |
27,052 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The items
accounting for the difference between income taxes computed at the U.S. federal
statutory rate and our effective rate were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
Year Ended June 30, |
|
2015 |
|
|
2014 |
|
|
2013 |
|
|||
|
|
|
|
|
|||||||||
|
Federal statutory rate |
|
|
35.0% |
|
|
|
35.0% |
|
|
|
35.0% |
|
|
Effect of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign earnings taxed at lower rates |
|
|
(20.9)% |
|
|
|
(17.1)% |
|
|
|
(17.5)% |
|
|
Phone Hardware nondeductible charges and valuation allowance |
|
|
19.1% |
|
|
|
0.9% |
|
|
|
0% |
|
|
Domestic production activities deduction |
|
|
(2.4)% |
|
|
|
(1.0)% |
|
|
|
(1.2)% |
|
|
Other reconciling items, net |
|
|
3.3% |
|
|
|
2.9% |
|
|
|
2.9% |
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Effective rate |
|
|
34.1% |
|
|
|
20.7% |
|
|
|
19.2% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The reduction
from the federal statutory rate is primarily due to foreign earnings taxed at
lower rates resulting from producing and distributing our products and services
through our foreign regional operations centers in Ireland, Singapore, and
Puerto Rico. In fiscal year 2015, this reduction was mostly offset by losses in
foreign jurisdictions for which we may not realize a tax benefit, primarily as
a result of impairment and restructuring charges. Excluding these losses, our
foreign earnings, which are taxed at rates lower than the U.S. rate and are
generated from our regional operating centers, were 73%, 81%, and 79% of our
foreign income before tax in fiscal years 2015, 2014, and 2013, respectively.
In general, other reconciling items consist of interest, U.S. state income
taxes, and credits. In fiscal years 2015, 2014, and 2013, there were no
individually significant other reconciling items.
The components of the
deferred income tax assets and liabilities were as follows:
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
||
|
|
|
|||||||
|
|
|
|
||||||
|
June 30, |
|
2015 |
|
|
2014 |
|
||
|
|
|
|
||||||
|
Deferred Income Tax Assets |
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Stock-based compensation expense |
|
$ |
884 |
|
|
$ |
903 |
|
|
Other expense items |
|
|
1,531 |
|
|
|
1,112 |
|
|
Restructuring charges |
|
|
211 |
|
|
|
0 |
|
|
Unearned revenue |
|
|
520 |
|
|
|
520 |
|
|
Impaired investments |
|
|
257 |
|
|
|
272 |
|
|
Loss carryforwards |
|
|
1,158 |
|
|
|
922 |
|
|
Depreciation and amortization |
|
|
798 |
|
|
|
0 |
|
|
Other revenue items |
|
|
56 |
|
|
|
64 |
|
|
|
|
|
|
|
|
|||
|
Deferred income tax assets |
|
|
5,415 |
|
|
|
3,793 |
|
|
Less valuation allowance |
|
|
(2,265 |
) |
|
|
(903 |
) |
|
|
|
|
|
|
|
|||
|
Deferred income tax assets, net of
valuation allowance |
|
$ |
3,150 |
|
|
$ |
2,890 |
|
|
|
|
|
|
|
|
|||
|
|
|
|
||||||
|
Deferred Income Tax Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Foreign earnings |
|
$ |
(1,280 |
) |
|
$ |
(1,140 |
) |
|
Unrealized gain on investments and debt |
|
|
(2,223 |
) |
|
|
(1,974 |
) |
|
Depreciation and amortization |
|
|
(685 |
) |
|
|
(470 |
) |
|
Other |
|
|
(29 |
) |
|
|
(87 |
) |
|
|
|
|
|
|
|
|||
|
Deferred income tax liabilities |
|
|
(4,217 |
) |
|
|
(3,671 |
) |
|
|
|
|
|
|
|
|||
|
Net deferred income tax assets (liabilities) |
|
$ |
(1,067 |
) |
|
$ |
(781 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Reported As |
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Current deferred income tax assets |
|
$ |
1,915 |
|
|
$ |
1,941 |
|
|
Other current liabilities |
|
|
(211 |
) |
|
|
(125 |
) |
|
Other long-term assets |
|
|
64 |
|
|
|
131 |
|
|
Long-term deferred income tax liabilities |
|
|
(2,835 |
) |
|
|
(2,728 |
) |
|
|
|
|
|
|
|
|||
|
Net deferred income tax assets (liabilities) |
|
$ |
(1,067 |
) |
|
$ |
(781 |
) |
|
|
|
|
|
|
|
|
|
|
As
of June 30, 2015, we had net operating loss carryforwards of $4.6 billion,
including $1.8 billion of foreign net operating loss carryforwards acquired
through our acquisition of Skype, and $545 million through our acquisition of
NDS. The valuation allowance disclosed in the table above relates to the
foreign net operating loss carryforwards and other future deductible net
deferred tax assets that may not be realized.
Deferred
income tax balances reflect the effects of temporary differences between the
carrying amounts of assets and liabilities and their tax bases and are stated
at enacted tax rates expected to be in effect when the taxes are actually paid
or recovered.
As
of June 30, 2015, we have not provided deferred U.S. income taxes or foreign
withholding taxes on temporary differences of approximately $108.3 billion
resulting from earnings for certain non-U.S. subsidiaries which are permanently
reinvested outside the U.S. The unrecognized deferred tax liability associated
with these temporary differences was approximately $34.5 billion at June 30,
2015.
Income
taxes paid were $4.4 billion, $5.5 billion, and $3.9 billion in fiscal years
2015, 2014, and 2013, respectively.
Uncertain Tax Positions
Unrecognized tax benefits
as of June 30, 2015, 2014, and 2013, were $9.6 billion, $8.7 billion, and $8.6
billion, respectively. If
recognized, these tax benefits would affect our effective tax rates for fiscal
years 2015, 2014, and 2013, by $7.9 billion, $7.0 billion, and $6.5 billion,
respectively.
As
of June 30, 2015, 2014, and 2013, we had accrued interest expense related to
uncertain tax positions of $1.7 billion, $1.5 billion, and $1.3 billion,
respectively, net of federal income tax benefits. Interest expense on
unrecognized tax benefits was $237 million, $235 million, and $400 million in
fiscal years 2015, 2014, and 2013, respectively, and was included in income tax expense.
The aggregate changes in
the balance of unrecognized tax benefits were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
|||
|
|
|
|||||||||||
|
|
|
|
|
|||||||||
|
Year Ended June 30, |
|
2015 |
|
|
2014 |
|
|
2013 |
|
|||
|
|
|
|
|
|||||||||
|
Balance, beginning of year |
|
$ |
8,714 |
|
|
$ |
8,648 |
|
|
$ |
7,202 |
|
|
Decreases related to settlements |
|
|
(50 |
) |
|
|
(583 |
) |
|
|
(30 |
) |
|
Increases for tax positions related to the
current year |
|
|
1,091 |
|
|
|
566 |
|
|
|
612 |
|
|
Increases for tax positions related to
prior years |
|
|
94 |
|
|
|
217 |
|
|
|
931 |
|
|
Decreases for tax positions related to
prior years |
|
|
(144 |
) |
|
|
(95 |
) |
|
|
(65 |
) |
|
Decreases due to lapsed statutes of
limitations |
|
|
(106 |
) |
|
|
(39 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|||
|
Balance, end of year |
|
$ |
9,599 |
|
|
$ |
8,714 |
|
|
$ |
8,648 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During
the third quarter of fiscal year 2011, we reached a settlement of a portion of
an I.R.S. audit of tax years 2004 to 2006, which reduced our income tax expense
by $461 million. While we settled a portion of the I.R.S. audit, we remain
under audit for these years. In February 2012, the I.R.S. withdrew its 2011
Revenue Agents Report and reopened the audit phase of the examination. As of
June 30, 2015, the primary unresolved issue relates to transfer pricing, which
could have a significant impact on our consolidated financial statements if not
resolved favorably. We believe our allowances for income tax contingencies are
adequate. We have not received a proposed assessment for the unresolved issues
and do not expect a final resolution of these issues in the next 12
months. Based on the information currently available, we do not anticipate
a significant increase or decrease to our tax contingencies for these issues
within the next 12 months. We also continue to be subject to examination by the
I.R.S. for tax years 2007 to 2015.
We
are subject to income tax in many jurisdictions outside the U.S. Our operations
in certain jurisdictions remain subject to examination for tax years 1996 to 2015,
some of which are currently under audit by local tax authorities. The
resolutions of these audits are not expected to be material to our consolidated
financial statements.
NOTE 14 Ń RESTRUCTURING CHARGES
Phone Hardware Integration
In
July 2014, we announced a restructuring plan to simplify our organization and
align NDS with our companyŐs overall strategy (the ŇPhone Hardware Integration
PlanÓ). Pursuant to the Phone Hardware Integration Plan, we eliminated approximately
19,000 positions in fiscal year 2015, including approximately 13,000
professional and factory positions related to the NDS business. The actions
associated with the Phone Hardware Integration Plan were completed as of June 30,
2015.
In
connection with the Phone Hardware Integration Plan, we incurred restructuring
charges of $1.3 billion during fiscal year 2015, including severance expenses
and other reorganization costs, primarily associated with our facilities
consolidation and write-downs of certain assets.
Phone
Hardware Restructuring
In
June 2015, management approved a plan to restructure our Phone Hardware
business to better focus and align resources (the ŇPhone Hardware Restructuring
PlanÓ), under which we will eliminate up to 7,800 positions in fiscal year
2016. In connection with the Phone Hardware Restructuring Plan, we recorded
restructuring charges of $780 million during fiscal year 2015, including
severance expenses and other reorganization costs, primarily related to
contractual obligations. The actions associated with the Phone Hardware
Restructuring Plan are expected to be completed as of June 30, 2016.
Restructuring
charges associated with each plan were included in impairment, integration, and
restructuring expenses in our consolidated income statement, and reflected in
Corporate and Other in our table of operating income (loss) by segment group in
Note 22 Đ Segment Information and Geographic Data.
Changes in the restructuring liability were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
Severance |
|
|
Asset Impairments and Other(a) |
|
|
Total |
|
|||
|
|
|
|||||||||||
|
|
|
|
|
|||||||||
|
Restructuring liability as of June 30, 2014 |
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
Restructuring charges |
|
|
1,308 |
|
|
|
770 |
|
|
|
2,078 |
|
|
Cash paid |
|
|
(701 |
) |
|
|
(134 |
) |
|
|
(835 |
) |
|
Other |
|
|
(19 |
) |
|
|
(387 |
) |
|
|
(406 |
) |
|
|
|
|
|
|
|
|
|
|
|
|||
|
Restructuring liability
as of June 30, 2015 |
|
$ |
588 |
|
|
$ |
249 |
|
|
$ |
837 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) ŇAsset
Impairments and OtherÓ primarily reflects activities associated with the
consolidation of our facilities and manufacturing operations, including asset
write-downs of $372 million during fiscal year 2015, as well as contract
termination costs.
NOTE 15 Ń UNEARNED REVENUE
Unearned revenue by segment was as follows,
with segments with significant balances shown separately:
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
||
|
|
|
|||||||
|
|
|
|
||||||
|
June 30, |
|
2015 |
|
|
2014 |
|
||
|
|
|
|
||||||
|
Commercial Licensing |
|
$ |
17,672 |
|
|
$ |
19,099 |
|
|
Commercial Other |
|
|
5,641 |
|
|
|
3,934 |
|
|
Rest of the segments |
|
|
2,005 |
|
|
|
2,125 |
|
|
|
|
|
|
|
|
|||
|
Total |
|
$ |
25,318 |
|
|
$ |
25,158 |
|
|
|
|
|
|
|
|
|
|
|
NOTE 16 Ń OTHER LONG-TERM LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
||
|
|
|
|||||||
|
|
|
|
||||||
|
June 30, |
|
2015 |
|
|
2014 |
|
||
|
|
|
|
||||||
|
Tax contingencies and other tax
liabilities |
|
$ |
12,290 |
|
|
$ |
10,510 |
|
|
Other |
|
|
1,254 |
|
|
|
1,084 |
|
|
|
|
|
|
|
|
|||
|
Total |
|
$ |
13,544 |
|
|
$ |
11,594 |
|
|
|
|
|
|
|
|
|
|
|
NOTE 17 Ń COMMITMENTS AND GUARANTEES
Construction and Operating Leases
We
have committed $681 million for constructing new buildings, building
improvements, and leasehold improvements as of June 30, 2015.
We have operating leases
for most U.S. and international sales and support offices, research and
development facilities, manufacturing facilities, retail stores, and certain
equipment. Rental expense for facilities operating leases was $989 million,
$874 million, and $711 million, in fiscal years 2015, 2014, and 2013,
respectively. Future minimum rental commitments under non-cancellable
facilities operating leases in place as of June 30, 2015 are as follows:
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
|
|||
|
|
|
|||
|
Year Ending June 30, |
|
|
|
|
|
|
|
|||
|
2016 |
|
$ |
863 |
|
|
2017 |
|
|
803 |
|
|
2018 |
|
|
735 |
|
|
2019 |
|
|
611 |
|
|
2020 |
|
|
524 |
|
|
Thereafter |
|
|
1,617 |
|
|
|
|
|||
|
Total |
|
$ |
5,153 |
|
|
|
|
|
|
|
Indemnifications
We
provide indemnifications of varying scope and size to certain customers against
claims of intellectual property infringement made by third parties arising from
the use of our products and certain other matters. We evaluate estimated losses
for these indemnifications, and we consider such factors as the degree of
probability of an unfavorable outcome and the ability to make a reasonable
estimate of the amount of loss. To date, we have not encountered significant
costs as a result of these obligations and have not accrued any liabilities
related to these indemnifications in our consolidated financial statements.
NOTE 18 Ń CONTINGENCIES
Patent and Intellectual Property Claims
Motorola litigation
In
October 2010, Microsoft filed patent infringement complaints against Motorola
Mobility (ŇMotorolaÓ) with the International Trade Commission (ŇITCÓ) and in
U.S. District Court in Seattle for infringement of nine Microsoft patents by
MotorolaŐs Android devices. Microsoft and Motorola have filed additional claims
against each other with the ITC, in federal district courts in Seattle,
Wisconsin, Florida, and California, and in courts in Germany. The nature of the
claims asserted and status of individual matters are summarized below.
International Trade Commission
In
2012, the ITC issued a limited exclusion order against Motorola on one
Microsoft patent, which was affirmed on appeal. In 2013, Microsoft filed an
action in U.S. District Court in Washington, D.C. seeking an order to compel
enforcement of the ITCŐs 2012 import ban against infringing Motorola products
by the Bureau of Customs and Border Protection (ŇCBPÓ), after learning that CBP
had failed to fully enforce the order.
In 2010, Motorola filed an action against Microsoft
with the ITC alleging infringement of five Motorola patents by Xbox consoles
and accessories and seeking an exclusion order to prohibit importation of the
allegedly infringing Xbox products. At MotorolaŐs request, the ITC terminated
its investigation of four Motorola patents. In 2013, the ITC affirmed there was
no violation of the remaining Motorola patent. Motorola appealed the ITCŐs
decision to the U.S. Court of Appeals for the Federal Circuit.
U.S. District Court
The Seattle District Court case filed in October
2010 by Microsoft as a companion to MicrosoftŐs ITC case against Motorola was
stayed pending the outcome of the ITC case.
In
November 2010, Microsoft sued Motorola for breach of contract in U.S. District
Court in Seattle, alleging that Motorola breached its commitments to
standards-setting organizations to license to Microsoft certain patents on
reasonable and non-discriminatory (ŇRANDÓ) terms and conditions. Motorola has
declared these patents essential to the implementation of the H.264 video
standard and the 802.11 Wi-Fi standard. In the Motorola ITC case described
above and in suits described below, Motorola or a Motorola affiliate
subsequently sued Microsoft on those patents in U.S. District Courts, in the
ITC, and in Germany. In 2012, the Seattle District Court granted a partial
summary judgment in favor of Microsoft ruling that (1) Motorola had
committed to standards organizations to license its declared-essential patents
on RAND terms and conditions; and (2) Microsoft is a third-party
beneficiary of those commitments. After trial, the Seattle District Court set
per unit royalties for MotorolaŐs H.264 and 802.11 patents, which resulted in
an immaterial Microsoft liability. In 2013, following trial of MicrosoftŐs
breach of contract claim, a jury awarded $14.5 million in damages to Microsoft.
Motorola appealed with respect to both the CourtŐs determination of royalties
due Motorola and the juryŐs award of damages against Motorola; in July 2015 the
U.S. Court of Appeals for the Ninth Circuit affirmed the trial courtŐs judgment
in all respects.
Cases filed by Motorola in Wisconsin, California,
and Florida, with the exception of one case in Wisconsin initially stayed and
later dismissed without prejudice (a companion case to MotorolaŐs ITC action),
have been transferred to the U.S District Court in Seattle. Motorola and
Microsoft both seek damages as well as injunctive relief. The court has stayed
these cases in Seattle on agreement of the parties.
Ľ In
the transferred cases, Motorola asserts 15 patents are infringed by a range of
Microsoft products including mobile and PC operating system, productivity,
server, communication, browser and gaming products.
Ľ In
the Motorola action originally filed in California, Motorola asserts Microsoft
violated antitrust laws in connection with MicrosoftŐs assertion of patents
against Motorola that Microsoft agreed to license to certain qualifying
entities on RAND terms and conditions.
Ľ In
counterclaims, Microsoft asserts 14 patents are infringed by Motorola Android
devices and certain Motorola digital video recorders.
Germany
In 2011, Motorola filed patent infringement actions
in Germany against Microsoft and several Microsoft subsidiaries.
Ľ Motorola
asserts two patents (both now expired) are essential to implementation of the
H.264 video standard, and Motorola alleges that H.264 capable products
including Xbox 360, Windows 7, Media Player, and Internet Explorer infringe
those patents. In 2012, the court issued an injunction relating to all H.264
capable Microsoft products in Germany, which Microsoft appealed. Orders in the
litigation pending in Seattle, Washington described above enjoin Motorola from
enforcing the German injunction.
Ľ Motorola
asserts that one patent covers certain syncing functionality in the ActiveSync
protocol employed by Windows Phone 7, Outlook Mobile, Hotmail Mobile, Exchange
Online, Exchange Server, and Hotmail Server. In 2013, the court stayed the case
pending the outcome of parallel proceedings in which Microsoft is seeking to
invalidate the patent. In 2013, the Federal Patent Court invalidated the
originally issued patent claims, but ruled that certain new amended claims were
patentable. Both Motorola and Microsoft appealed. In June 2014, the court
reopened infringement proceedings, which are currently stayed.
Ľ Microsoft
may be able to mitigate the adverse impact of any injunction by altering its
products to avoid MotorolaŐs infringement claims.
Ľ Any
damages would be determined in separate proceedings.
In lawsuits Microsoft filed in Germany in 2011 and
2012, Microsoft asserts that Motorola Android devices infringe Microsoft
patents and is seeking damages and injunctions. In 2012, regional courts in
Germany issued injunctions on three of the Microsoft patents, which Motorola
appealed. One judgment has been affirmed on appeal (and Motorola has further
appealed), and the other two appeals are pending (in one of these two cases the
asserted patent has expired). An additional infringement proceeding is still
pending in the court of first instance. In actions filed separately by Motorola
to invalidate these patents, the Federal Patent Court in 2013 and 2014 held the
Microsoft patents invalid, and Microsoft appealed. For the cases in which
Microsoft obtained injunctions, if Motorola were to prevail following all
appeals, Motorola could have a claim against Microsoft for damages caused by an
erroneously granted injunction.
IPCom patent litigation
IPCom
GmbH & Co. (ŇIPComÓ) is a German company that holds a large portfolio
of mobile technology-related patents spanning about 170 patent families and
addressing a broad range of cellular technologies. IPCom has asserted 19 of
these patents in litigation against Nokia and many of the leading cell phone
companies and operators. In November 2014, Microsoft and IPCom entered into a
standstill agreement staying all of the pending litigation against Microsoft to
permit the parties to pursue settlement discussions.
InterDigital patent litigation
InterDigital
Technology Corporation and InterDigital Communications Corporation
(collectively, ŇIDTÓ) filed four patent infringement cases against Nokia in the
ITC and in U.S. District Court for the District of Delaware between 2007 and
2013. We have been added to these cases as a defendant. IDT has cases pending against
other defendants based on the same patents because most of the patents at issue
allegedly relate to 3G and 4G wireless communications standards essential
functionality. The cases involving us include three ITC investigations where
IDT is seeking an order excluding importation of 3G and 4G phones into the U.S.
and one active case in U.S. District Court in Delaware seeking an injunction
and damages. The ITC issued a finding of no violation relating to two of the
investigations, which IDT appealed. In February 2015, the U.S. Court of Appeals
for the Federal Circuit affirmed one of the ITCŐs findings; the other has been
stayed. In the third ITC action the administrative law judge (ŇALJÓ) issued a
determination finding: (1) infringement; (2) evidence of Ňreverse hold-up;Ó and
(3) the public interest does not preclude issuance of an exclusion order. The
ITC is reviewing the ALJŐs initial determination. The trial in the Delaware
case is scheduled for November 2015.
European copyright levies
We
assumed from Nokia all potential liability due to NokiaŐs alleged failure to
pay Ňprivate copying leviesÓ in various European countries based upon sale of
memory cards and mobile phones that incorporate blank memory. The levies
are based upon a 2001 European Union (ŇEUÓ) Directive establishing a right for
end users to make copies of copyrighted works for personal or private use, but
also allowing the collection of levies based upon sales of blank media or
recording devices to compensate copyright holders for private copying. Various
collecting societies in EU countries initiated litigation against Nokia,
stating that Nokia must pay levies not only based upon sales of blank memory
cards, but also phones that include blank memory for data storage on the
phones, regardless of actual usage of that memory. The most significant
cases against Nokia are pending in Germany and Austria, due to both the high
volume of sales and high levy amounts sought in these countries. Since
April 2015, we and other major manufacturers have been engaged in settlement
negotiations with the German collecting society, with the aim of concluding
negotiations by October 2015.
Other patent and intellectual property
claims
In
addition to these cases, there are approximately 70 other patent infringement cases
pending against Microsoft.
Antitrust, Unfair Competition, and
Overcharge Class Actions
A
large number of antitrust and unfair competition class action lawsuits were
filed against us in various state, federal, and Canadian courts on behalf of
various classes of direct and indirect purchasers of our PC operating system
and certain other software products between 1999 and 2005.
We
obtained dismissals or reached settlements of all claims made in the U.S. Under
the settlements, generally class members can obtain vouchers that entitle them
to be reimbursed for purchases of a wide variety of platform-neutral computer
hardware and software. The total value of vouchers that we may issue varies by
state. We will make available to certain schools a percentage of those vouchers
that are not issued or claimed (one-half to two-thirds depending on the state).
The total value of vouchers we ultimately issue will depend on the number of
class members who make claims and are issued vouchers. We estimate the total remaining
cost of the settlements is approximately $200 million, all of which had been
accrued as of June 30, 2015.
Three
similar cases pending in British Columbia, Ontario, and Quebec, Canada have not
been settled. In 2010, the court in the British Columbia case certified it as a
class action. After the British Columbia Court of Appeal dismissed the case, in
2013 the Canadian Supreme Court reversed the appellate court and reinstated
part of the British Columbia case, which is now scheduled for trial in 2016. The
other two cases are inactive.
Other Antitrust Litigation and Claims
GO Computer litigation
In
June 2005, GO Computer Inc. and co-founder Jerry Kaplan filed a complaint in
California state court asserting antitrust claims under the Cartwright Act
related to the business of the former GO Corporation in the early 1990s and its
successor in interest, Lucent Corporation in the early 2000s. All claims prior
to June 2001 have been dismissed with prejudice as barred by the statute of
limitations. The case is moving forward with discovery, and a trial is set for
September 2015.
China State Administration for Industry and
Commerce investigation
In
July 2014, Microsoft was informed that ChinaŐs State Administration for
Industry and Commerce (ŇSAICÓ) had begun a formal investigation relating to
ChinaŐs Anti-Monopoly Law, and the SAIC conducted onsite inspections of
Microsoft offices in Beijing, Shanghai, Guangzhou, and Chengdu. SAIC has
stated the investigation relates to compatibility, bundle sales, and file
verification issues related to Windows and Office software.
Product-Related Litigation
U.S. cell phone litigation
Nokia,
along with other handset manufacturers and network operators, is a defendant in
19 lawsuits filed in the Superior Court for the District of Columbia by
individual plaintiffs who allege that radio emissions from cellular handsets
caused their brain tumors and other adverse health effects. We have assumed
responsibility for these claims as part of the NDS acquisition and have been
substituted for the Nokia defendants. Nine of these cases were filed in 2002
and are consolidated for certain pre-trial proceedings; the remaining 10 cases
are stayed. In a separate 2009 decision, the Court of Appeals for the District
of Columbia held that adverse health effect claims arising from the use of
cellular handsets that operate within the U.S. Federal Communications
Commission radio frequency emission guidelines (ŇFCC GuidelinesÓ) are
pre-empted by federal law. The plaintiffs allege that their handsets either
operated outside the FCC Guidelines or were manufactured before the FCC Guidelines
went into effect. The lawsuits also allege an industry-wide conspiracy to
manipulate the science and testing around emission guidelines.
In September 2013, defendants in the consolidated
cases moved to exclude plaintiffsŐ expert evidence of general causation on the
basis of flawed scientific methodologies. In March 2014, defendants filed a
separate motion to preclude plaintiffsŐ general causation testimony. In August
2014, the court granted in part defendantsŐ motion to exclude plaintiffsŐ
general causation experts. The plaintiffs filed an interlocutory appeal. In
December 2014, the District of Columbia Court of Appeals agreed to hear en
banc defendantsŐ interlocutory appeal challenging the standard for
evaluating expert scientific evidence. Trial court proceedings are stayed
pending resolution of the appeal.
Canadian cell phone class action
Nokia,
along with other handset manufacturers and network operators, is a defendant in
a 2013 class action lawsuit filed in the Supreme Court of British Columbia by a
purported class of Canadians who have used cellular phones for at least 1,600
hours, including a subclass of users with brain tumors. Microsoft was served
with the complaint in June 2014 and has been substituted for the Nokia
defendants. The litigation is not yet active as several defendants remain to be
served.
Other
We
also are subject to a variety of other claims and suits that arise from time to
time in the ordinary course of our business. Although management currently
believes that resolving claims against us, individually or in aggregate, will
not have a material adverse impact on our consolidated financial statements,
these matters are subject to inherent uncertainties and managementŐs view of
these matters may change in the future.
As
of June 30, 2015, we accrued aggregate legal liabilities of $614 million in
other current liabilities and $20 million in other long-term liabilities. While
we intend to defend these matters vigorously, adverse outcomes that we estimate
could reach approximately $1.6 billion in aggregate beyond recorded amounts are
reasonably possible. Were unfavorable final outcomes to occur, there exists the
possibility of a material adverse impact on our consolidated financial
statements for the period in which the effects become reasonably estimable.
NOTE 19 Ń STOCKHOLDERSŐ EQUITY
Shares
Outstanding
Shares of
common stock outstanding were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
|||
|
|
|
|||||||||||
|
|
|
|
|
|||||||||
|
Year Ended June 30, |
|
2015 |
|
|
2014 |
|
|
2013 |
|
|||
|
|
|
|
|
|||||||||
|
Balance, beginning of year |
|
|
8,239 |
|
|
|
8,328 |
|
|
|
8,381 |
|
|
Issued |
|
|
83 |
|
|
|
86 |
|
|
|
105 |
|
|
Repurchased |
|
|
(295 |
) |
|
|
(175 |
) |
|
|
(158 |
) |
|
|
|
|
|
|
|
|
|
|
|
|||
|
Balance, end of year |
|
|
8,027 |
|
|
|
8,239 |
|
|
|
8,328 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share Repurchases
On
September 16, 2013, our Board of Directors approved a share repurchase
program authorizing up to $40.0 billion in share repurchases. The share
repurchase program became effective on October 1, 2013, has no expiration
date, and may be suspended or discontinued at any time without notice. This
share repurchase program replaced the share repurchase program that was
announced on September 22, 2008 and expired on September 30, 2013. As of June
30, 2015, $21.9 billion remained of our $40.0 billion share repurchase program.
All repurchases were made using cash resources.
We repurchased the following shares of common stock
under the above-described repurchase plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
||||||
|
|
|
|||||||||||||||||||||||
|
|
|
|
|
|
|
|
||||||||||||||||||
|
Year Ended June 30, |
|
2015 |
|
|
2014 (a) |
|
|
2013 |
|
|||||||||||||||
|
|
|
|
|
|
|
|
||||||||||||||||||
|
First quarter |
|
|
43 |
|
|
$ |
2,000 |
|
|
|
47 |
|
|
$ |
1,500 |
|
|
|
33 |
|
|
$ |
1,000 |
|
|
Second quarter |
|
|
43 |
|
|
|
2,000 |
|
|
|
53 |
|
|
|
2,000 |
|
|
|
58 |
|
|
|
1,607 |
|
|
Third quarter |
|
|
116 |
|
|
|
5,000 |
|
|
|
47 |
|
|
|
1,791 |
|
|
|
36 |
|
|
|
1,000 |
|
|
Fourth quarter |
|
|
93 |
|
|
|
4,209 |
|
|
|
28 |
|
|
|
1,118 |
|
|
|
31 |
|
|
|
1,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total |
|
|
295 |
|
|
$ |
13,209 |
|
|
|
175 |
|
|
$ |
6,409 |
|
|
|
158 |
|
|
$ |
4,607 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) Of
the 175 million shares repurchased in fiscal year 2014, 128 million shares were
repurchased for $4.9 billion under the share repurchase program approved by our Board of Directors on
September 16, 2013 and 47 million shares were repurchased for $1.5 billion
under the share repurchase program that was announced on September 22, 2008 and
expired on September 30, 2013.
The above table excludes shares repurchased to
settle statutory employee tax withholding related to the vesting of stock
awards.
Dividends
In fiscal year 2015, our Board of Directors
declared the following dividends:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
Declaration Date |
|
Dividend Per Share |
|
|
Record Date |
|
|
Total Amount |
|
|
Payment Date |
|
|||||||||||
|
|
|
||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|||||||||||
|
|
|
|
|
|
|||||||||||||||||||
|
September 16, 2014 |
|
$ |
0.31 |
|
|
|
November 20, 2014 |
|
|
$ |
2,547 |
|
|
|
December 11, 2014 |
|
|||||||
|
December 3, 2014 |
|
$ |
0.31 |
|
|
|
February 19, 2015 |
|
|
$ |
2,532 |
|
|
|
March 12, 2015 |
|
|||||||
|
March 10, 2015 |
|
$ |
0.31 |
|
|
|
May 21, 2015 |
|
|
$ |
2,496 |
|
|
|
June 11, 2015 |
|
|||||||
|
June 9, 2015 |
|
$ |
0.31 |
|
|
|
August 20, 2015 |
|
|
$ |
2,488 |
|
|
|
September 10, 2015 |
|
|||||||
|
|
|
||||||||||||||||||||||
The
dividend declared on June 9, 2015 will be paid after the filing date of
this Form 10-K and was included in other current liabilities as of June 30,
2015.
In fiscal year
2014, our Board of Directors declared the following dividends:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Declaration Date |
|
Dividend Per Share |
|
|
Record Date |
|
|
Total Amount |
|
|
Payment Date |
|
||||
|
|
|
|||||||||||||||
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
||||
|
|
|
|
|
|
||||||||||||
|
September 16, 2013 |
|
$ |
0.28 |
|
|
|
November 21, 2013 |
|
|
$ |
2,332 |
|
|
|
December 12, 2013 |
|
|
November 19, 2013 |
|
$ |
0.28 |
|
|
|
February 20, 2014 |
|
|
$ |
2,322 |
|
|
|
March 13, 2014 |
|
|
March 11, 2014 |
|
$ |
0.28 |
|
|
|
May 15, 2014 |
|
|
$ |
2,309 |
|
|
|
June 12, 2014 |
|
|
June 10, 2014 |
|
$ |
0.28 |
|
|
|
August 21, 2014 |
|
|
$ |
2,307 |
|
|
|
September 11, 2014 |
|
|
|
|
|||||||||||||||
The dividend
declared on June 10, 2014 was included in other current liabilities as of
June 30, 2014.
NOTE 20 Ń ACCUMULATED OTHER COMPREHENSIVE INCOME
The following table summarizes the changes in
accumulated other comprehensive income by component:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
(In millions) |
|
|
|
|
|
|
|
|
|
||||||
|
|
|
||||||||||||||
|
|
|
|
|
||||||||||||
|
Year Ended June 30, |
|
2015 |
|
|
2014 |
|
|
2013 |
|
||||||
|
|
|
|
|
||||||||||||
|
Derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
||||||||||||
|
Accumulated other comprehensive income balance, beginning of period |
|
$ |
31 |
|
|
$ |
66 |
|
|
$ |
92 |
|
|||
|
Unrealized gains, net of
tax effects of $35, $2 and $54 |
|
|
1,152 |
|
|
|
63 |
|
|
|
101 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Reclassification
adjustments for gains included in revenue |
|
|
(608 |
) |
|
|
(104 |
) |
|
|
(195 |
) |
|||
|
Tax expense included in
provision for income taxes |
|
|
15 |
|
|
|
6 |
|
|
|
68 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Amounts reclassified from
accumulated other comprehensive income |
|
|
(593 |
) |
|
|
(98 |
) |
|
|
(127 |
) |
|||
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Net current period other
comprehensive income (loss) |
|
|
559 |
|
|
|
(35 |
) |
|
|
(26 |
) |
|||
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Accumulated other comprehensive
income balance, end of period |
|
$ |
590 |
|
|
$ |
31 |
|
|
$ |
66 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
||||||
|
|
|
|
|
||||||||||||
|
Investments |
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
||||||||||||
|
Accumulated other
comprehensive income balance, beginning of period |
|
$ |
3,531 |
|
|
$ |
1,794 |
|
|
$ |
1,431 |
|
|||
|
Unrealized gains, net of
tax effects of $59, $1,067 and $244 |
|
|
110 |
|
|
|
2,053 |
|
|
|
453 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Reclassification
adjustments for gains included in other income (expense), net |
|
|
(728 |
) |
|
|
(447 |
) |
|
|
(139 |
) |
|||
|
Tax expense included in
provision for income taxes |
|
|
256 |
|
|
|
131 |
|
|
|
49 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Amounts reclassified from
accumulated other comprehensive income |
|
|
(472 |
) |
|
|
(316 |
) |
|
|
(90 |
) |
|||
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Net current period other
comprehensive income (loss) |
|
|
(362 |
) |
|
|
1,737 |
|
|
|
363 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Accumulated other
comprehensive income balance, end of period |
|
$ |
3,169 |
|
|
$ |
3,531 |
|
|
$ |
1,794 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
||||||
|
|
|
|
|
||||||||||||
|
Translation Adjustments
and Other |
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
||||||||||||
|
Accumulated other
comprehensive income (loss) balance, beginning of period |
|
$ |
146 |
|
|
$ |
(117 |
) |
|
$ |
(101 |
) |
|||
|
Translation adjustments
and other, net of tax effects of $16, $12 and $(8) |
|
|
(1,383 |
) |
|
|
263 |
|
|
|
(16 |
) |
|||
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Accumulated other
comprehensive income (loss) balance, end of period |
|
$ |
(1,237 |
) |
|
$ |
146 |
|
|
$ |
(117 |
) |
|||
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Accumulated other
comprehensive income, end of period |
|
$ |
2,522 |
|
|
$ |
3,708 |
|
|
$ |
1,743 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
NOTE 21 Ń EMPLOYEE STOCK AND SAVINGS PLANS
We
grant stock-based compensation to directors and employees. At June 30, 2015, an
aggregate of 294 million shares were authorized for future grant under our
stock plans. Awards that expire or are canceled without delivery of shares
generally become available for issuance under the plans. We issue new shares of
Microsoft common stock to satisfy exercises and vesting of awards granted under
all of our stock plans.
Stock-based compensation expense and related income
tax benefits were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
|||
|
|
|
|||||||||||
|
|
|
|
|
|||||||||
|
Year Ended June 30, |
|
2015 |
|
|
2014 |
|
|
2013 |
|
|||
|
|
|
|
|
|||||||||
|
Stock-based compensation expense |
|
$ |
2,574 |
|
|
$ |
2,446 |
|
|
$ |
2,406 |
|
|
Income tax benefits related to stock-based
compensation |
|
$ |
868 |
|
|
$ |
830 |
|
|
$ |
842 |
|
|
|
|
|||||||||||
Stock Plans
Stock awards
Stock
awards (ŇSAsÓ) are grants that entitle the holder to shares of Microsoft common
stock as the award vests. SAs generally vest over a four or five-year period.
Executive incentive plan
Under
the Executive Incentive Plan, the Compensation Committee awards SAs to
executive officers and certain senior executives. The SAs vest ratably in
August of each of the four years following the grant date.
Activity for all stock plans
The fair value of each award was estimated on the
date of grant using the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
|
|
|
|
|||||||||
|
Year Ended June 30, |
|
2015 |
|
|
2014 |
|
|
2013 |
|
|||
|
|
|
|
|
|||||||||
|
Dividends per share
(quarterly amounts) |
|
$ |
0.28 - $ 0.31 |
|
|
$ |
0.23 - $ 0.28 |
|
|
$ |
0.20 - $ 0.23 |
|
|
Interest rates range |
|
|
1.2% - 1.9% |
|
|
|
1.3% - 1.8% |
|
|
|
0.6% - 1.1% |
|
|
|
|
|||||||||||
During fiscal
year 2015, the following activity occurred under our stock plans:
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
|
Weighted Average Grant-Date Fair Value |
|
||||
|
|
|
|||||||
|
(In millions) |
|
|
|
|
||||
|
|
||||||||
|
Stock Awards |
|
|||||||
|
|
|
|
||||||
|
Nonvested balance, beginning of year |
|
|
259 |
|
|
$ |
27.88 |
|
|
Granted |
|
|
75 |
|
|
$ |
42.36 |
|
|
Vested |
|
|
(94 |
) |
|
$ |
27.47 |
|
|
Forfeited |
|
|
(24 |
) |
|
$ |
31.81 |
|
|
|
|
|
|
|
|
|||
|
Nonvested balance, end of year |
|
|
216 |
|
|
$ |
32.72 |
|
|
|
|
|
|
|
|
|
|
|
As
of June 30, 2015, there was approximately $4.7 billion of total unrecognized
compensation costs related to stock awards. These costs are expected to be
recognized over a weighted average period of 3 years.
During fiscal years 2014
and 2013, the following activity occurred under our stock plans:
|
|
|
|
|
|
|
|
|
|
|||
|
(In millions, except fair values) |
|
2014 |
|
|
2013 |
|
|||||
|
|
|
||||||||||
|
|
|
|
|||||||||
|
Stock Awards |
|
|
|
|
|
|
|||||
|
|
|
|
|||||||||
|
Awards granted (a) |
|
|
103 |
|
|
|
104 |
|
|||
|
Weighted average grant-date fair value |
|
$ |
31.50 |
|
|
$ |
28.37 |
|
|||
|
|
|
|
|
|
|
|
|
|
|||
(a) Awards granted during fiscal year 2014 included four million shares in stock
replacement awards related to the acquisition of NDS. The weighted average
grant-date fair value was $37.64.
Total
vest-date fair value of stock awards vested was $4.2 billion, $3.2 billion, and
$2.8 billion, for fiscal years 2015, 2014, and 2013, respectively.
Employee Stock Purchase Plan
We have an employee stock purchase plan (the
ŇPlanÓ) for all eligible employees. Shares of our common stock may be purchased
by employees at three-month intervals at 90% of the fair market value on the
last trading day of each three-month period. Employees may purchase shares
having a value not exceeding 15% of their gross compensation during an offering
period. Employees purchased the following shares during the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Shares in millions) |
|
|
|
|
|
|
|
|
|
|||
|
|
|
|||||||||||
|
|
|
|
|
|||||||||
|
Year Ended June 30, |
|
2015 |
|
|
2014 |
|
|
2013 |
|
|||
|
|
|
|
|
|||||||||
|
Shares purchased |
|
|
16 |
|
|
|
18 |
|
|
|
20 |
|
|
Average price per share |
|
$ |
39.87 |
|
|
$ |
33.60 |
|
|
$ |
26.81 |
|
|
|
|
|||||||||||
At June 30, 2015, 157 million shares of our
common stock were reserved for future issuance through the Plan.
Savings Plan
We
have a savings plan in the U.S. that qualifies under Section 401(k) of the
Internal Revenue Code, and a number of savings plans in international
locations. Participating U.S. employees may contribute up to 75% of their
salary, but not more than statutory limits. We contribute fifty cents for each
dollar of the first 6% a participant contributes in this plan, with a maximum
contribution of the lesser of 3% of a participantŐs earnings or 3% of the IRS
compensation limit for the given year. Matching contributions for all plans
were $454 million, $420 million, and $393 million in fiscal years 2015, 2014,
and 2013, respectively, and were expensed as contributed. Matching
contributions in the U.S. plan are invested proportionate to each participantŐs
voluntary contributions in the investment options provided under the plan.
Investment options in the U.S. plan include Microsoft common stock, but neither
participant nor our matching contributions are required to be invested in
Microsoft common stock.
NOTE 22 Ń SEGMENT INFORMATION AND GEOGRAPHIC DATA
In
its operation of the business, management, including our chief operating
decision maker, the companyŐs Chief Executive Officer, reviews certain
financial information, including segmented internal profit and loss statements
prepared on a basis not consistent with U.S. GAAP. The segment information in
this note is reported on that basis. During the periods presented, we reported
our financial performance based on the following segments; D&C Licensing,
Computing and Gaming Hardware, Phone Hardware, D&C Other, Commercial
Licensing, and Commercial Other.
On April 25, 2014, we acquired substantially
all of NDS. See Note 9 Đ Business Combinations for additional details. NDS has
been included in our consolidated results of operations since the acquisition
date. We report the financial performance of the acquired business in our Phone
Hardware segment. Prior to the acquisition of NDS, financial results associated
with our joint strategic initiatives with Nokia were reflected in our D&C
Licensing segment. The contractual relationship with Nokia related to those
initiatives ended in conjunction with the acquisition.
Our
reportable segments are described below.
Devices and Consumer
Our D&C segments develop, manufacture, market,
and support products and services designed to entertain and connect people,
increase personal productivity, help people simplify tasks and make more
informed decisions online, and help advertisers connect with audiences. Our
D&C segments are:
Ľ D&C
Licensing, comprising: Windows, including all OEM licensing (ŇWindows OEMÓ)
and other non-volume licensing and academic volume licensing of the Windows
operating system and related software; non-volume licensing of Microsoft
Office, comprising the core Office product set, for consumers (ŇOffice
ConsumerÓ); Windows Phone operating system, including related patent licensing;
and certain other patent licensing revenue.
Ľ Computing and Gaming Hardware,
comprising: Xbox gaming and entertainment consoles and accessories,
second-party and third-party video game royalties, and Xbox Live subscriptions
(ŇXbox PlatformÓ); Surface devices and accessories (ŇSurfaceÓ); and Microsoft
PC accessories.
Ľ Phone
Hardware, comprising: Lumia phones and other non-Lumia phones, beginning
with our acquisition of NDS.
Ľ D&C
Other, comprising: Resale, consisting of transactions in our Windows Store and
Xbox marketplace; search advertising; display advertising; Office 365 Consumer,
comprising Office 365 Home and Office 365 Personal; Studios, comprising
first-party video games; Mojang; non-Microsoft products sold in our retail
stores; and certain other consumer products and services not included in the
categories above.
Commercial
Our Commercial segments develop, market, and
support software and services designed to increase individual, team, and
organizational productivity and efficiency, including simplifying everyday
tasks through seamless operations across the userŐs hardware and software. Our
Commercial segments are:
Ľ Commercial
Licensing, comprising: server products, including Windows Server, Microsoft
SQL Server, Visual Studio, System Center, and related Client Access Licenses
(ŇCALsÓ); Windows Embedded; volume licensing of the Windows operating system,
excluding academic (ŇWindows CommercialÓ); Microsoft Office for business,
including Office, Exchange, SharePoint, Skype for Business, and related CALs
(ŇOffice CommercialÓ); Microsoft Dynamics business solutions, excluding
Dynamics CRM Online; and Skype.
Ľ Commercial
Other, comprising: Enterprise Services, including Premier Support Services
and Microsoft Consulting Services; Commercial Cloud, comprising Office 365
Commercial, other Microsoft Office online offerings, Dynamics CRM Online, and
Microsoft Azure; and certain other commercial products and online services not
included in the categories above.
Revenue
and cost of revenue are generally directly attributed to our segments. Certain
revenue contracts are allocated among the segments based on the relative value
of the underlying products and services, which can include allocation based on
actual prices charged, prices when sold separately, or estimated costs plus a
profit margin. Cost of revenue is directly charged to our hardware segments.
For the remaining segments, cost of revenue is directly charged in most cases
and allocated in certain cases, generally using a relative revenue methodology.
We
do not allocate operating expenses to our segments. Rather, we allocate them to
our two segment groups, Devices and Consumer and Commercial. Due to the
integrated structure of our business, allocations of expenses are made in
certain cases to incent cross-collaboration among our segment groups so that a
segment group is not solely burdened by the cost of a mutually beneficial
activity as we seek to deliver seamless experiences across devices, whether
on-premises or in the cloud.
Operating expenses are attributed to our segment
groups as follows:
Ľ Sales
and marketing expenses are primarily recorded directly to each segment group
based on identified customer segment.
Ľ Research
and development expenses are primarily shared across the segment groups based
on relative gross margin but are mapped directly in certain cases where the
value of the expense only accrues to that segment group.
Ľ General
and administrative expenses are primarily allocated based on relative gross
margin.
Certain
corporate-level activity is not allocated to our segment groups, including
costs of: legal, including expenses, settlements, and fines; information
technology; human resources; finance; excise taxes; and impairment, integration,
and restructuring expenses.
Segment revenue and gross
margin were as follows during the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|||||||||||||
|
|
|
|
|
|
||||||||||
|
Year Ended June 30, |
|
|
|
2015 |
|
|
2014 |
|
|
2013 |
|
|||
|
|
|
|
|
|
||||||||||
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
||||||||||
|
Devices and Consumer |
|
Licensing |
|
$ |
14,969 |
|
|
$ |
19,528 |
|
|
$ |
19,427 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hardware: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computing and Gaming
Hardware |
|
|
10,183 |
|
|
|
9,093 |
|
|
|
6,149 |
|
|
|
|
Phone Hardware |
|
|
7,524 |
|
|
|
1,982 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
Total Devices and
Consumer Hardware |
|
|
17,707 |
|
|
|
11,075 |
|
|
|
6,149 |
|
|
|
|
Other |
|
|
8,825 |
|
|
|
7,014 |
|
|
|
6,431 |
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
Total Devices and
Consumer |
|
|
41,501 |
|
|
|
37,617 |
|
|
|
32,007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
Licensing |
|
|
41,039 |
|
|
|
42,085 |
|
|
|
39,778 |
|
|
|
|
Other |
|
|
10,836 |
|
|
|
7,546 |
|
|
|
5,661 |
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
Total Commercial |
|
|
51,875 |
|
|
|
49,631 |
|
|
|
45,439 |
|
|
Corporate and Other |
|
|
|
|
204 |
|
|
|
(415 |
) |
|
|
403 |
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Total revenue |
|
|
|
$ |
93,580 |
|
|
$ |
86,833 |
|
|
$ |
77,849 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|||||||||||||
|
|
|
|
|
|
||||||||||
|
Year Ended June 30, |
|
|
|
2015 |
|
|
2014 |
|
|
2013 |
|
|||
|
|
|
|
|
|
||||||||||
|
Gross margin |
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
||||||||||
|
Devices and Consumer |
|
Licensing |
|
$ |
13,870 |
|
|
$ |
17,439 |
|
|
$ |
16,985 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hardware: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computing and Gaming Hardware |
|
|
1,788 |
|
|
|
892 |
|
|
|
956 |
|
|
|
|
Phone Hardware |
|
|
701 |
|
|
|
54 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
Total Devices and Consumer Hardware |
|
|
2,489 |
|
|
|
946 |
|
|
|
956 |
|
|
|
|
Other |
|
|
2,022 |
|
|
|
1,393 |
|
|
|
1,951 |
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
Total Devices and Consumer |
|
|
18,381 |
|
|
|
19,778 |
|
|
|
19,892 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
Licensing |
|
|
37,830 |
|
|
|
38,615 |
|
|
|
36,280 |
|
|
|
|
Other |
|
|
4,199 |
|
|
|
1,855 |
|
|
|
922 |
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
Total Commercial |
|
|
42,029 |
|
|
|
40,470 |
|
|
|
37,202 |
|
|
Corporate and Other |
|
|
|
|
132 |
|
|
|
(493 |
) |
|
|
370 |
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Total gross margin |
|
|
|
$ |
60,542 |
|
|
$ |
59,755 |
|
|
$ |
57,464 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Below are operating expenses by segment group. As
discussed above, we do not allocate operating expenses to our segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|||||||||
|
|
|
|||||||||||
|
|
|
|
|
|||||||||
|
Year Ended June 30, |
|
2015 |
|
|
2014 |
|
|
2013 |
|
|||
|
|
|
|
|
|||||||||
|
Devices and Consumer |
|
$ |
11,505 |
|
|
$ |
11,219 |
|
|
$ |
10,625 |
|
|
Commercial |
|
|
17,177 |
|
|
|
16,993 |
|
|
|
16,050 |
|
|
Corporate and Other |
|
|
3,688 |
|
|
|
3,657 |
|
|
|
4,025 |
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total segment operating
expenses |
|
|
32,370 |
|
|
|
31,869 |
|
|
|
30,700 |
|
|
Impairment, integration, and restructuring |
|
|
10,011 |
|
|
|
127 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
$ |
42,381 |
|
|
$ |
31,996 |
|
|
$ |
30,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Below is operating income (loss) by segment group.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|||||||||
|
|
|
|||||||||||
|
|
|
|
|
|||||||||
|
Year Ended June 30, |
|
2015 |
|
|
2014 |
|
|
2013 |
|
|||
|
|
|
|
|
|||||||||
|
Devices and Consumer |
|
$ |
6,876 |
|
|
$ |
8,559 |
|
|
$ |
9,267 |
|
|
Commercial |
|
|
24,852 |
|
|
|
23,477 |
|
|
|
21,152 |
|
|
Corporate and Other |
|
|
(13,567 |
) |
|
|
(4,277 |
) |
|
|
(3,655 |
) |
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total operating income |
|
$ |
18,161 |
|
|
$ |
27,759 |
|
|
$ |
26,764 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
and Other operating income includes adjustments to conform our internal
accounting policies to U.S. GAAP, corporate-level activity not specifically
attributed to a segment, and impairment, integration, and restructuring
expenses. Significant internal accounting policies that differ from U.S. GAAP
relate to revenue recognition, income statement classification, and
depreciation.
Corporate and Other activity was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
|||
|
|
|
|||||||||||
|
|
|
|
|
|||||||||
|
Year Ended June 30, |
|
2015 |
|
|
2014 |
|
|
2013 |
|
|||
|
|
|
|
|
|||||||||
|
Corporate (a) (b) |
|
$ |
(13,575 |
) |
|
$ |
(3,744 |
) |
|
$ |
(4,102 |
) |
|
Other (adjustments to
U.S. GAAP): |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue reconciling amounts (c) |
|
|
204 |
|
|
|
(415 |
) |
|
|
403 |
|
|
Cost of revenue reconciling amounts |
|
|
(72 |
) |
|
|
(78 |
) |
|
|
(31 |
) |
|
Operating expenses reconciling amounts |
|
|
(124 |
) |
|
|
(40 |
) |
|
|
75 |
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total Corporate and Other |
|
$ |
(13,567 |
) |
|
$ |
(4,277 |
) |
|
$ |
(3,655 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) Corporate
is presented on the basis of our internal accounting policies and excludes the
adjustments to U.S. GAAP that are presented separately in those line items.
(b) Corporate for fiscal year 2015 included impairment,
integration, and restructuring expenses of $10.0 billion.
(c) Revenue
reconciling amounts for fiscal year 2015 included a net $303 million of
previously deferred net revenue related to sales of bundled products and
services (ŇBundled OfferingsÓ). Revenue reconciling amounts for fiscal year
2014 included a net $349 million of revenue deferrals related to Bundled
Offerings. Revenue reconciling amounts for fiscal year 2013 included the
recognition of $540 million of revenue previously
deferred on sales of Windows 7 with an option to upgrade to Windows 8 Pro at a
discounted price.
No sales to an individual customer or country other
than the United States accounted for more than 10% of fiscal year 2015, 2014,
or 2013 revenue. Revenue, classified by the major geographic areas in which our
customers are located, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|||||||||
|
|
|
|||||||||||
|
|
|
|
|
|||||||||
|
Year Ended June 30, |
|
2015 |
|
|
2014 |
|
|
2013 |
|
|||
|
|
|
|
|
|||||||||
|
United States (a) |
|
$ |
42,941 |
|
|
$ |
43,474 |
|
|
$ |
41,344 |
|
|
Other countries |
|
|
50,639 |
|
|
|
43,359 |
|
|
|
36,505 |
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total |
|
$ |
93,580 |
|
|
$ |
86,833 |
|
|
$ |
77,849 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) Includes
billings to OEMs and certain multinational organizations because of the nature
of these businesses and the impracticability of determining the geographic
source of the revenue.
Revenue from external customers, classified by significant product and
service offerings were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|||||||||
|
|
|
|||||||||||
|
|
|
|
|
|||||||||
|
Year Ended June 30, |
|
2015 |
|
|
2014 |
|
|
2013 |
|
|||
|
|
|
|
|
|||||||||
|
Microsoft Office system |
|
$ |
23,538 |
|
|
$ |
24,323 |
|
|
$ |
22,995 |
|
|
Server products and tools |
|
|
18,612 |
|
|
|
17,055 |
|
|
|
15,408 |
|
|
Windows PC operating system |
|
|
14,826 |
|
|
|
16,856 |
|
|
|
17,529 |
|
|
Xbox |
|
|
9,121 |
|
|
|
8,643 |
|
|
|
7,100 |
|
|
Phone |
|
|
7,702 |
|
|
|
3,073 |
|
|
|
615 |
|
|
Consulting and product support services |
|
|
5,090 |
|
|
|
4,767 |
|
|
|
4,372 |
|
|
Advertising |
|
|
4,557 |
|
|
|
4,016 |
|
|
|
3,387 |
|
|
Surface |
|
|
3,900 |
|
|
|
1,883 |
|
|
|
853 |
|
|
Other |
|
|
6,234 |
|
|
|
6,217 |
|
|
|
5,590 |
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total |
|
$ |
93,580 |
|
|
$ |
86,833 |
|
|
$ |
77,849 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our total Commercial Cloud revenue was $5.8
billion, $2.8 billion, and $1.3 billion in fiscal years 2015, 2014, and 2013,
respectively. These amounts are included in their respective product categories
in the table above.
Assets are not allocated to segments for internal
reporting presentations. A portion of amortization and depreciation is charged
to the respective segment. It is impracticable for us to separately identify
the amount of amortization and depreciation by segment that is included in the
measure of segment profit or loss.
Long-lived assets, excluding financial instruments
and tax assets, classified by the location of the controlling statutory company
and with countries over 10% of the total shown separately, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|||||||||
|
|
|
|||||||||||
|
|
|
|
|
|||||||||
|
June 30, |
|
2015 |
|
|
2014 |
|
|
2013 |
|
|||
|
|
|
|
|
|||||||||
|
United States |
|
$ |
19,562 |
|
|
$ |
17,653 |
|
|
$ |
16,615 |
|
|
Luxembourg |
|
|
6,879 |
|
|
|
6,913 |
|
|
|
6,943 |
|
|
Finland |
|
|
1,757 |
|
|
|
9,840 |
|
|
|
12 |
|
|
Other countries |
|
|
8,307 |
|
|
|
5,713 |
|
|
|
4,159 |
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total |
|
$ |
36,505 |
|
|
$ |
40,119 |
|
|
$ |
27,729 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 23 Ń QUARTERLY
INFORMATION (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
(In millions, except per
share amounts) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
|
|
|
|||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||||||||||||||
|
Quarter Ended |
|
September 30 |
|
|
December 31 |
|
|
March 31 |
|
|
June 30 |
|
|
Total |
|
|||||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||||||||||||||
|
Fiscal Year 2015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
|
|
|
|
|
|
|||||||||||||||||||||||||||
|
Revenue |
|
|
$ 23,201 |
|
|
|
$ 26,470 |
|
|
|
$ 21,729 |
|
|
|
$ 22,180 |
|
|
|
$ 93,580 |
|
||||||||||||
|
Gross margin |
|
|
14,928 |
|
|
|
16,334 |
|
|
|
14,568 |
|
|
|
14,712 |
|
|
|
60,542 |
|
||||||||||||
|
Net income (loss) |
|
|
4,540 |
|
|
|
5,863 |
|
|
|
4,985 |
|
|
|
(3,195 |
) (a) |
|
|
12,193 |
(b) |
||||||||||||
|
Basic earnings (loss) per
share |
|
|
0.55 |
|
|
|
0.71 |
|
|
|
0.61 |
|
|
|
(0.40 |
) |
|
|
1.49 |
|
||||||||||||
|
Diluted earnings (loss)
per share |
|
|
0.54 |
|
|
|
0.71 |
|
|
|
0.61 |
|
|
|
(0.40 |
) (a) |
|
|
1.48 |
(b) |
||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||||||||||||||
|
Fiscal Year 2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
|
|
|
|
|
|
|||||||||||||||||||||||||||
|
Revenue |
|
|
$ 18,529 |
|
|
|
$ 24,519 |
|
|
|
$ 20,403 |
|
|
|
$ 23,382 |
|
|
|
$ 86,833 |
|
||||||||||||
|
Gross margin |
|
|
13,384 |
|
|
|
16,197 |
|
|
|
14,425 |
|
|
|
15,749 |
|
|
|
59,755 |
|
||||||||||||
|
Net income |
|
|
5,244 |
|
|
|
6,558 |
|
|
|
5,660 |
|
|
|
4,612 |
(c) |
|
|
22,074 |
(c) |
||||||||||||
|
Basic earnings per share |
|
|
0.63 |
|
|
|
0.79 |
|
|
|
0.68 |
|
|
|
0.56 |
|
|
|
2.66 |
|
||||||||||||
|
Diluted earnings per share |
|
|
0.62 |
|
|
|
0.78 |
|
|
|
0.68 |
|
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|
0.55 |
(c) |
|
|
2.63 |
(c) |
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(a)
Includes $7.5 billion of
goodwill and asset impairment charges related to Phone Hardware, as well as $940
million of integration and restructuring expenses, primarily costs associated
with our Phone Hardware Restructuring Plan, which decreased fourth quarter
fiscal year 2015 net income by $8.4 billion and diluted EPS by $1.02.
(b)
Includes $7.5 billion of
goodwill and asset impairment charges related to Phone Hardware, as well as
$2.5 billion of integration and restructuring expenses, primarily costs
associated with our restructuring plans, which decreased fiscal year 2015 net
income by $10.0 billion and diluted EPS by $1.15.
(c)
Includes a tax provision adjustment recorded in the fourth quarter of
fiscal year 2014 related to adjustments to prior yearsŐ liabilities for
intercompany transfer pricing which decreased net income by $458 million and
diluted EPS by $0.05.
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Stockholders of Microsoft Corporation
Redmond, Washington
We
have audited the accompanying consolidated balance sheets of Microsoft
Corporation and subsidiaries (the ŇCompanyÓ) as of June 30, 2015 and 2014, and
the related consolidated statements of income, comprehensive income, cash
flows, and stockholdersŐ equity for each of the three years in the period ended
June 30, 2015. These financial statements are the responsibility of the
CompanyŐs management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In
our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Microsoft Corporation and
subsidiaries as of June 30, 2015 and 2014, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
2015, in conformity with accounting principles generally accepted in the United
States of America.
We
have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the CompanyŐs internal control over financial
reporting as of June 30, 2015, based on the criteria established in Internal
Control Đ Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our report dated
July 31, 2015, expressed an unqualified opinion on the CompanyŐs internal
control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
Seattle,
Washington
July 31, 2015
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not
applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Under
the supervision and with the participation of our management, including the
Chief Executive Officer and Chief Financial Officer, we have evaluated the
effectiveness of our disclosure controls and procedures as required by Exchange
Act Rule 13a-15(b) as of the end of the period covered by this report. Based on
that evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that these disclosure controls and procedures are effective.
REPORT OF MANAGEMENT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting for the company. Internal control over
financial reporting is a process to provide reasonable assurance regarding the
reliability of our financial reporting for external purposes in accordance with
accounting principles generally accepted in the United States of America.
Internal control over financial reporting includes maintaining records that in
reasonable detail accurately and fairly reflect our transactions; providing
reasonable assurance that transactions are recorded as necessary for
preparation of our financial statements; providing reasonable assurance that
receipts and expenditures of company assets are made in accordance with
management authorization; and providing reasonable assurance that unauthorized
acquisition, use or disposition of company assets that could have a material
effect on our financial statements would be prevented or detected on a timely
basis. Because of its inherent limitations, internal control over financial
reporting is not intended to provide absolute assurance that a misstatement of
our financial statements would be prevented or detected.
Management
conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in Internal Control Đ Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations
of the Treadway Commission. Based on this evaluation, management concluded that
the companyŐs internal control over financial reporting was effective as of
June 30, 2015. There were no changes in our internal control over financial
reporting during the quarter ended June 30, 2015 that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting. Deloitte & Touche LLP has audited our internal
control over financial reporting as of June 30, 2015; their report is included
in Item 9A.
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Stockholders of Microsoft Corporation
Redmond, Washington
We
have audited the internal control over financial reporting of Microsoft
Corporation and subsidiaries (the ŇCompanyÓ) as of June 30, 2015, based on
criteria established in Internal Control Đ Integrated Framework (2013) issued
by the Committee of Sponsoring Organizations of the Treadway
Commission. The CompanyŐs management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in the
accompanying Report of Management on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on the CompanyŐs
internal control over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
companyŐs internal control over financial reporting is a process designed by,
or under the supervision of, the companyŐs principal executive and principal
financial officers, or persons performing similar functions, and effected by
the companyŐs board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A companyŐs internal control
over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companyŐs assets that could have a
material effect on the financial statements.
Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In
our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of June 30, 2015, based on the
criteria established in Internal Control Đ Integrated Framework (2013) issued
by the Committee of Sponsoring Organizations of the Treadway Commission.
We
have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated financial
statements as of and for the year ended June 30, 2015, of the Company and our
report dated July 31, 2015, expressed an unqualified opinion on those financial
statements.
/s/ DELOITTE & TOUCHE LLP
Seattle,
Washington
July 31, 2015
ITEM 9B. OTHER INFORMATION
Not
applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
A
list of our executive officers and biographical information appears in Part I,
Item 1 of this Form 10-K. Information about our directors may be found
under the caption ŇOur director nomineesÓ in our Proxy Statement for the Annual
Meeting of Shareholders to be held December 2, 2015 (the ŇProxy
StatementÓ). Information about our Audit Committee may be found under the
caption ŇBoard committeesÓ in the Proxy Statement. That information is
incorporated herein by reference.
The
information in the Proxy Statement set forth under the caption ŇSection 16(a)
Beneficial ownership reporting complianceÓ is incorporated herein by reference.
We
have adopted the Microsoft Finance Code of Professional Conduct (the Ňfinance
code of ethicsÓ), a code of ethics that applies to our Chief Executive Officer,
Chief Financial Officer, Chief Accounting Officer and Corporate Controller, and
other finance organization employees. The finance code of ethics is publicly
available on our website at www.microsoft.com/investor/MSFinanceCode. If we
make any substantive amendments to the finance code of ethics or grant any
waiver, including any implicit waiver, from a provision of the code to our
Chief Executive Officer, Chief Financial Officer, or Chief Accounting Officer
and Corporate Controller, we will disclose the nature of the amendment or
waiver on that website or in a report on Form 8-K.
ITEM 11. EXECUTIVE COMPENSATION
The
information in the Proxy Statement set forth under the captions ŇDirector
compensation,Ó ŇNamed executive officer compensation,Ó ŇCompensation Committee
interlocks and insider participation,Ó and ŇCompensation Committee reportÓ is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The
information in the Proxy Statement set forth under the captions ŇInformation
regarding beneficial ownership of principal shareholders, directors, and
managementÓ and ŇEquity compensation plan informationÓ is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The
information set forth in the Proxy Statement under the captions ŇDirector
independenceÓ and ŇCertain relationships and related transactionsÓ is
incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information
concerning principal accountant fees and services appears in the Proxy
Statement under the headings ŇFees billed by Deloitte & ToucheÓ and
ŇPolicy on Audit Committee pre-approval of audit and permissible non-audit
services of independent auditorÓ and is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) Financial
Statements and Schedules
The
financial statements are set forth under Item 8 of this Form 10-K, as
indexed below. Financial statement schedules have been omitted since they
either are not required, not applicable, or the information is otherwise
included.
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Index to Financial Statements |
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Page |
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Income Statements |
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47 |
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Comprehensive Income Statements |
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48 |
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Balance Sheets |
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49 |
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Cash Flows Statements |
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50 |
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StockholdersŐ Equity Statements |
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51 |
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Notes to Financial Statements |
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52 |
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Report of Independent Registered Public
Accounting Firm |
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91 |
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(b) Exhibit
Listing
* Indicates
a management contract or compensatory plan or arrangement
** Furnished,
not filed
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned; thereunto duly authorized, in the City of Redmond, State of
Washington, on July 31, 2015.
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MICROSOFT CORPORATION |
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/S/ FRANK H. BROD |
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Frank H. Brod |
|
Corporate Vice President, Finance and Administration; Chief Accounting Officer (Principal Accounting Officer) |
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of Registrant and in the
capacities indicated on July 31, 2015.
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Signature |
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Title |
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||
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/s/ JOHN W. THOMPSON
John W.
Thompson |
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Chairman |
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/s/ SATYA NADELLA Satya Nadella |
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Director and
Chief Executive Officer |
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/s/ WILLIAM H. GATES III
William H.
Gates III |
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Director |
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/s/ MARIA M. KLAWE
Maria M. Klawe |
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Director |
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/s/ Teri L. List-Stoll Teri L. List-Stoll |
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Director |
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/s/ G. MASON MORFIT
G. Mason
Morfit |
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Director |
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/s/ CHARLES H. NOSKI
Charles H.
Noski |
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Director |
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/s/ HELMUT PANKE
Helmut Panke |
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Director |
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/s/ Charles
W. Scharf
Charles W.
Scharf |
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Director |
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/s/ John W.
Stanton
John W.
Stanton |
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Director |
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/s/ AMY E. HOOD
Amy E. Hood |
|
Executive Vice President and Chief Financial
Officer (Principal
Financial Officer) |
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/s/ FRANK H. BROD
Frank H. Brod |
|
Corporate Vice President, Finance and Administration; Chief Accounting Officer (Principal
Accounting Officer) |
Exhibit 10.14
MICROSOFT CORPORATION
DEFERRED COMPENSATION PLAN
FOR
NON-EMPLOYEE DIRECTORS
(Amended and Restated
Effective January 1, 2015)
1. Purpose
The purpose
of the Microsoft Corporation Deferred Compensation Plan for Non-Employee
Directors (the "Plan") is to further the long-term growth of
Microsoft Corporation (the "Company") by allowing the non-employee
directors of the Company the opportunity to defer certain compensation, keeping
their financial interests aligned with the Company, and providing them with a
long-term incentive to continue providing services to the Company.
This Plan
is intended to comply with section 409A of the Internal Revenue Code of 1986,
as amended (the "Code") and official guidance issued thereunder. Notwithstanding any other provision of
this Plan, this Plan shall be interpreted, operated and administered in a
manner consistent with this intention.
2. Effective
Date
The Plan
is effective January 16, 2006.
This restatement of the Plan is effective January 1, 2015.
3. Definitions
In
addition to the terms defined above, the following terms shall have the
meanings indicated below.
Account Đ means a bookkeeping account
established by the Company for each Participant electing to defer Eligible
Compensation under the Plan, which may include sub-accounts for amounts payable
at different times and/or payable in different forms.
Affiliate Đ means any corporation or other
entity that is treated as a single employer with the Company under Code section
414.
Board Đ means the Board of Directors of
Microsoft Corporation.
Cash
Retainer Đ means
the amount of annual retainer payable in cash for service on the Board,
including any annual retainer payable for service as a chair or member of any
Board committee.
Common
Stock Đ means the
Common Stock, $0.00000625 par value, of the Company.
Director Đ means a member of the Board who
is not an officer or employee of the Company or any Affiliate.
Eligible
Compensation Đ
means both the Cash Retainer and Equity Retainer. For the avoidance of doubt, Eligible
Compensation earned in a Plan Year refers to the Cash Retainer and Equity
Retainer earned in the four quarterly cycles beginning in the applicable Plan
Year measured from the date of the annual shareholders meeting in the
immediately prior Plan Year.
Equity
Retainer Đ means
the amount of annual retainer payable in Common Stock for service on the Board,
including any annual retainer payable for service as a chair or member of any
Board committee.
New
Director Đ means a
Director who was not eligible to participate in the Plan (or any other plan
sponsored by the Company or any Affiliate, which may be aggregated with the
Plan under Code section 409A) prior to becoming a Director; provided, all
Directors providing services to the Company as of the Effective Date shall be
deemed to be New Directors for purposes of making an initial election pursuant
to Section 5.1(b)(ii) with respect to Eligible Compensation earned in
2006.
Open
Enrollment Đ means
the period during each Plan Year when Directors may elect to make, terminate or
change an initial election to defer amounts under the Plan. Open Enrollment
shall normally be held during the month of December of each Plan Year.
Participant
Đ means a Director
who elects to defer Eligible Compensation under the Plan.
Plan
Administrator Đ
means the Compensation Committee of the Board, or its delegate or delegates
appointed to administer the Plan.
Plan
Year Đ means the
12-month period from January 1 to December 31.
Separation
from Service or Separates from Service Đ means a "separation from service" with the
Company and its Affiliates within the meaning of Code section 409A.
HR
Officer Đ means the
senior corporate officer in charge of the Human Resources department, currently
the Chief People Officer.
4. Participation
4.1 Any
Director shall be eligible to participate in the Plan. A Director becomes a Participant in the
Plan on the date he or she first enrolls in the Plan by electing to defer
Eligible Compensation in accordance with Section 5.1(b).
4.2 A
Director who has been a Participant under the Plan will cease to be a
Participant on the date his or her Account is fully distributed.
5. Participant
Accounts
5.1 Elections
to Defer Eligible Compensation
(a) Initial
Deferral Election. A Director
may make an irrevocable election to defer the following types of Eligible
Compensation in one (1) percent increments up to the specified maximum
percentages:
(i) A
Director may elect to defer up to 100% of his or her Cash Retainer.
(ii) A
Director may elect to defer up to 100% of his or her Equity Retainer.
(b) Time
and Manner of Making an Initial Election
(i) A
Director may make an irrevocable election to defer one or more types of Eligible
Compensation during the Open Enrollment period that occurs in the Plan Year
preceding the Plan Year in which the Eligible Compensation is earned.
(ii) In
addition to Open Enrollment elections under Section 5.1(b)(i), a New
Director may make an irrevocable election to defer one or more types of
Eligible Compensation, provided such election is made within thirty
(30) days of becoming a New Director and such election shall only apply to
amounts earned after the election is filed.
(iii) A
deferral election shall be made in accordance with procedures established by
the Plan Administrator.
(c) Evergreen
Election. An initial deferral
election shall be effective for succeeding Plan Years and shall become
irrevocable on each December 31 with respect to Eligible Compensation earned in
the immediately following Plan Year unless the Participant terminates or
modifies such election. A
Participant may terminate or modify an initial deferral election during the
Open Enrollment period immediately prior to the applicable Plan Year. Any termination of, or modification to,
an initial deferral election shall be made in accordance with procedures
established by the Plan Administrator.
5.2 Crediting
of Deferrals. Eligible
Compensation deferred by a Participant under the Plan shall be credited to the
Participant's Account as soon as practicable after the amounts would have
otherwise been paid to the Participant.
Amounts credited to a Participant's Account shall be deemed immediately
invested in shares of Common Stock (calculated to one one-thousandth of a
share). Any dividends which would
have been received had such amount actually been invested in shares of Common
Stock will also be credited to the Participant's Account and deemed immediately
invested in additional shares of Common Stock (calculated to one one-thousandth
of a share). Nothing in this
Section or otherwise in the Plan, however, will require the Company to actually
invest any amounts credited to a Participant's Account in shares of Common
Stock or otherwise.
5.3 Vesting. A Participant shall at all times be
one-hundred (100) percent vested in any amounts credited to his or her
Account.
5.4 Adjustments
upon Changes in Capitalization.
If any change is made to the shares of Common Stock without the
Company's receipt of consideration, appropriate adjustments shall be made to
the number and/or class of securities credited to a Participant's Account under
the Plan in the same manner and to the same extent that adjustments are made to
the maximum number and/or class of securities issuable under the Company's 1999
Stock Plan for Non-Employee Directors.
6. Distribution
of Account Balances
6.1 Distribution
Form
(a) In
the event a Participant elects to have the distribution of a deferred amount
(and dividends thereon) commence thirty (30) days following the date of
his or her Separation from Service pursuant to Section 6.2, the
Participant may elect to have the deferred amount (and dividends thereon)
distributed in a lump sum payment or in equal annual installments over a period
of five (5) years. Such
election must be made at the time of making the initial deferral election under
Section 5.1.
(b) In
the event a Participant fails to specify the form in which a deferred amount
(and dividends thereon) will be distributed at the time of making an initial
deferral election under Section 5.1, or if a Participant elects to receive
a distribution other than pursuant to Section 6.2(a)(i), the Participant
shall receive such deferred amount (and dividends thereon) in a lump sum payment.
(c) Distribution
of a Participant's Account balance shall be made in Common Stock; provided,
however, any fractional shares of Common Stock credited to the Account shall be
paid in cash.
6.2 Distribution
Time
(a) A
Participant may elect to have the distribution of a deferred amount (and
dividends thereon) commence thirty (30) days following: (i) the date of the Participant's
Separation from Service; (ii) the first, second, third, fourth or fifth
anniversary of the Participant's Separation from Service; or (iii) a
specified date or, if earlier, the fifth anniversary of the Participant's
Separation from Service (provided that the specified date must be at least
twelve (12) months after the date on which the final payment of the
deferred amount would have been made to the Participant absent deferral).
(b) A
Participant must elect the date on which distributions will commence at the
time of making the initial deferral election under Section 5.1. In the event a Participant fails to
elect the date on which a distribution will commence at the time of making an
initial deferral election under Section 5.1, or if a Participant specifies
a date under Section 6.2(a)(iii) that is less than twelve (12) months
after the date on which the final payment of the deferred amount would have
been made to the Participant absent deferral, the Participant shall receive the
distribution thirty (30) days following the date of the Participant's
Separation from Service.
(c) Except
as otherwise permitted under IRS guidance, if a distribution is to be made upon
the Separation from Service of a Key Employee, distribution may not be made
before the date which is six months after the date of the Key Employee's
Separation from Service (or, if earlier, the date of death of the Key Employee). Any payments that would otherwise be
made during this period of delay shall be paid in the seventh month following
Separation from Service (or, if earlier, the month after the Key Employee's
death). For this purpose, "Key
Employee" means an individual treated as a "specified employee"
under Code section 409A(a)(2)(B)(i) as of his or her Separation from Service
(i.e., a key employee (as defined under Code section 416(i) without regard to
paragraph (5) thereof) of a corporation any stock of which is publicly traded
on an established securities market or otherwise). Key Employees shall be determined in
accordance with Code section 409A, using a December 31 identification date. A listing of Key Employees as of an
identification date shall be effective for the 12-month period beginning on the
April 1 following the identification date.
(d) Notwithstanding
Section 6.1 or 6.2 or any election to the contrary, for purposes of Eligible
Compensation earned during each separate quarterly period beginning after 2014,
if a Participant Separates from Service during a separate quarterly period, the
distribution of any deferred amount (and dividends thereon) attributable to
such period will be paid in a cash lump sum within 30 days following the last
day of the quarterly period, subject to Section 6.2(c) and in accordance with
Treasury Regulation ¤1.409A-3(c).
6.3 Distributions
upon Death
(a) In
the event a Participant dies prior to the distribution of his or her entire
Account balance, the remaining Account balance shall be distributed to the
Participant's beneficiary in accordance with Sections 6.1 and 6.2 above.
(b) A
Participant shall designate his or her beneficiary prior to death in accordance
with procedures established by the Plan Administrator. If a Participant has not properly
designated a beneficiary, or if no designated beneficiary is living on the date
of any distribution, such amount shall be distributed to the Participant's
estate.
(c) For
purposes of determining the proper death beneficiary under this Plan, this Plan
shall not be interpreted as preempting applicable state law regarding the
ownership rights of Accounts upon a Participant's death. For example, although this Plan states
that upon a Participant's death, Account balances will be paid to his or her
beneficiary, the personal representative will be obligated to pay any benefits
owed to a spouse or otherwise as a result of any applicable community property
laws.
7. Administration
The Plan
Administrator shall be responsible for the operation and administration of the
Plan and for carrying out the provisions hereof. The Plan Administrator shall have the
full authority and discretion to make, amend, interpret, and enforce all
appropriate rules and regulations for the administration of this Plan and
decide or resolve any and all questions, including interpretations of this
Plan, as may arise in connection with this Plan. Any such action taken by the Plan
Administrator shall be final and conclusive on any party. To the extent the Plan Administrator has
been granted discretionary authority under the Plan, the Plan Administrator's
prior exercise of such authority shall not obligate it to exercise its
authority in a like fashion thereafter.
The Plan Administrator shall be entitled to rely conclusively upon all
tables, valuations, certificates, opinions and reports furnished by any
actuary, accountant, controller, counsel or other person employed or engaged by
the Company with respect to the Plan.
The Plan Administrator may, from time to time, employ agents and
delegate to such agents, including the HR Officer or other employees of the
Company, such administrative duties as it sees fit, and the HR Officer is
expressly delegated the authority to take all actions necessary to implement
the Plan in accordance with the terms approved by the Board and the Plan
Administrator.
8. Amendment
and Termination
8.1 Amendment
or Termination. The Company
reserves the right to amend or terminate the Plan when, in the sole discretion
of the Company, such amendment or termination is advisable, pursuant to a
resolution or other action taken by the Board or the Plan Administrator,
provided that the Board or Plan Administrator may delegate the authority to
amend the Plan to the HR Officer from time to time.
8.2 Effect
of Amendment or Termination. No
amendment or termination of the Plan shall decrease the amounts credited to a
Participant's Account as of such amendment or termination. Upon termination of the Plan,
Participants' Account balances shall be distributed in accordance with Sections
6.1 through 6.3, unless the Company determines in its sole discretion that all
such amounts shall be distributed upon termination in accordance with the
requirements under Code section 409A.
8.3 Constructive
Receipt Termination. If amounts
deferred under the Plan must be included in income under Code section 409A
prior to the scheduled distribution of such amounts, distribution of such
amount shall be made to Participants.
9. General
Provisions
9.1 Rights
Unsecured. The right of a Participant
or his or her beneficiary to receive a distribution hereunder shall be an
unsecured claim against the general assets of the Company, and neither the
Participant nor his or her beneficiary shall have any rights in or against any
amount credited to any Account or any other specific assets of the
Company. The Plan at all times
shall be considered entirely unfunded for tax purposes. Any funds set aside by the Company for
the purpose of meeting its obligations under the Plan, including any amounts held
by a trustee, shall continue for all purposes to be part of the general assets
of the Company and shall be available to its general creditors in the event of
the Company's bankruptcy or insolvency.
The Company's obligation under this Plan shall be that of an unfunded
and unsecured promise to pay money in the future.
9.2 Construction
of Plan. Nothing in this Plan
shall be construed to give any Director any right to receive Eligible
Compensation or any other type of compensation. No Participant or beneficiary shall have
any right to receive a distribution under the Plan except in accordance with
the terms of the Plan.
Establishment of the Plan shall not be construed to give any Participant
the right to be retained as a member of the Board. Nothing contained in the Plan shall
constitute a guarantee by the Company or any other person or entity that the
assets of the Company will be sufficient to pay any benefits hereunder. In the event any provision of the Plan
shall be held invalid or illegal for any reason, any illegality or invalidity
shall not affect the remaining parts of the Plan, but the Plan shall be
construed and enforced as if the illegal or invalid provision had never been
inserted. Words in the masculine
gender shall include the feminine and the singular shall include the plural,
and vice versa, unless qualified by the context. Any headings used herein are included
for ease of reference only, and are not to be construed so as to alter the
terms hereof.
9.3 Nonalienation
of Benefits. This Plan inures
to the benefit of and is binding upon the parties hereto and their successors,
heirs and assigns; provided, however, that the amounts credited to a
Participant's Account are not, except as provided in Section 9.4, subject
in any manner to anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance, charge, garnishment, execution or levy of any kind, either
voluntary or involuntary, and any attempt to anticipate, alienate, sell,
transfer, assign, pledge, encumber, charge or otherwise dispose of any right to
any benefits payable hereunder, will be null and void and not binding on the
Plan or the Company.
9.4 Taxes. The Company or other payor may withhold
from a benefit payment under the Plan or a Participant's Eligible Compensation
any federal, state, or local taxes required by law to be withheld with respect
to a payment or accrual under the Plan, and shall report such payments and
other Plan-related information to the appropriate governmental agencies as
required under applicable law.
9.5 Delivery
of Shares. The obligation of
the Company to issue shares of Common Stock under this Plan shall be subject to
all applicable laws, rules and regulations, including all applicable federal
and state securities laws, and the obtaining of all such approvals by
governmental agencies as may be deemed necessary or appropriate by the Plan
Administrator.
9.6 Participant's
Cooperation. The Participant
shall cooperate with the Company by furnishing any and all information
requested by the Plan Administrator in order to facilitate the payment of
benefits hereunder. If the
Participant refuses to cooperate, the Company shall have no further obligation
to the Participant under the Plan.
9.7 Incapacity
of Recipient. If any person
entitled to a distribution under the Plan is deemed by the Plan Administrator
to be incapable of personally receiving and giving a valid receipt for such
payment, then, unless and until a claim for such payment shall have been made
by a duly appointed guardian or other legal representative of such person, the
Plan Administrator may provide for such payment or any part thereof to be made
to any other person or institution then contributing toward or providing for
the care and maintenance of such person.
Any such payment shall be a payment for the account of such person and a
complete discharge of any liability of the Company and the Plan with respect to
the payment.
9.8 Legally
Binding. In the event of any
consolidation, merger, acquisition or reorganization, the obligations of the Company
under this Plan shall continue and be binding on the Company and its successors
or assigns. The rights, privileges,
benefits and obligations under the Plan are intended to be legal obligations of
the Company and binding upon the Company, its successors and assigns.
9.9 Unclaimed
Benefits. Each Participant
shall keep the Plan Administrator informed of his or her current address and
the current address of his or her designated beneficiary. The Plan Administrator shall not be
obligated to search for the whereabouts of any person if the location of a
person is not made known to the Plan Administrator.
9.10 Applicable
Law and Venue. The Plan shall
be governed by the laws of the State of Washington. In the event the Company or
any Participant (or beneficiary) initiates litigation related to this Plan, the
venue for such action will be in King County, Washington.
9.11 Waiver
of Breach. The waiver by the
Company of any breach of any provision of the Plan by a Participant shall not
operate or be construed as a waiver of any subsequent breach by the
Participant.
9.12 Notice. Any notice or filing required or
permitted to be given to the Plan Administrator under the Plan shall be
sufficient if in writing and hand-delivered, or sent by first class mail to the
principal office of the Company, directed to the attention of the Plan
Administrator. Such notice shall be
deemed given as of the date of delivery, or, if delivery is made by mail, as of
the date shown on the postmark.
9.13 Attorneys'
Fees and Costs. In the event
that a dispute regarding benefits arises between the Company or Plan
Administrator and a Participant (or beneficiary) and such dispute is resolved
through arbitration or litigation in court, the prevailing party(ies) shall be
entitled to their reasonable attorneys' fees and costs incurred in such action.
Exhibit 10.18
EXECUTIVE OFFICER INCENTIVE PLAN
(Section
162(m) Performance-Based Awards)
STOCK AWARD AGREEMENT UNDER
THE MICROSOFT CORPORATION 2001 STOCK PLAN
Award Number <<GrantIdentifier>>
This Award Agreement sets forth
the terms and conditions of an award (the ŇAwardÓ) of performance-based Stock
Awards (ŇSAsÓ) awarded to <<FullName>> (ŇAwardeeÓ) by
Microsoft Corporation (the ŇCompanyÓ) in the exercise of its sole discretion
under the Microsoft Corporation 2001 Stock Plan (the ŇPlanÓ) and pursuant to
the Microsoft Corporation Executive Officer Incentive Plan (the ŇEOIPÓ) on <<GrantDate>>
(the ŇAward DateÓ). Capitalized
terms used but not defined in this Award Agreement shall have the meanings
assigned to them in the Plan.
1. Award.
(a) The number of SAs initially
subject to the Award (the ŇGrantedSAsÓ) is <<Granted
SAs>>. The performance
period of the Award (the ŇPerformance PeriodÓ) is the CompanyŐs <<Year>>
fiscal year. At the end of the
Performance Period, the Committee (as that term is defined in Section 2(f) of
the Plan) will determine the number of SAs earned under the Award as set forth
in Section 2 (these earned SAs are the ŇEarned SAsÓ).
(b) The Earned SAs represent the
CompanyŐs unfunded and unsecured promise to issue Common Shares at a future
date, subject to the terms of this Award Agreement and the Plan. Awardee has no rights under the Earned
SAs other than the rights of a general unsecured creditor of the Company.
2. Performance Goal; Earned
SAs.
(a) Not later than 90 days after
the beginning of the Performance Period, the Committee shall determine the
performance goal (the ŇPerformance GoalÓ) for the Performance Period under the
EOIP, which shall apply to this Award and shall be set forth in Schedule A.
(b) Within a reasonable time
after the close of the Performance Period, and in no event later than 90 days
following the close of the Performance Period, the Committee shall determine
whether the Performance Goal has been met and, if applicable, certify in
accordance with the requirements of Code Section 162(m) to its
satisfaction. The date the
Committee makes this determination is the ŇDetermination DateÓ. If the Performance Goal has not been
met, the number of Earned SAs will be zero. If the Performance Goal has been met,
the number of Earned SAs will be determined by the Committee in accordance with
Schedule A.
3. Vesting of SAs.
(a) Subject to the terms of this Award Agreement and the Plan and provided that
Awardee remains continuously employed through the vesting dates set out below,
the Earned SAs shall vest as follows:
|
Vesting Date |
Percentage of Earned SAs |
|
[Insert six-month anniversary of last business day in August
preceding the Award Date] (ŇInitial Vest DateÓ) |
12.5% |
|
Each 6 month anniversary of the Initial Vest Date |
12.5% |
Vesting
will not occur before the first NASDAQ Stock Market regular trading day that is
on or after the applicable vesting date.
(b) Awardee agrees that the SAs
subject to this Award Agreement, and other incentive or performance-based
compensation Awardee receives or has received from the Company, shall be
subject to the CompanyŐs executive compensation recovery policy, as amended
from time to time.
(c) AWARDEEŐS RIGHTS IN THE SAs
SHALL BE AFFECTED, WITH REGARD TO BOTH VESTING SCHEDULE AND TERMINATION, BY
LEAVES OF ABSENCE, CHANGES IN THE NUMBER OF HOURS WORKED, PARTIAL DISABILITY,
AND OTHER CHANGES IN AWARDEEŐS EMPLOYMENT STATUS AS PROVIDED IN THE COMPANYŐS CURRENT
POLICIES FOR THESE MATTERS.
ACCOMPANYING THIS AWARD AGREEMENT IS A CURRENT COPY OF THESE
POLICIES. THESE POLICIES MAY CHANGE
FROM TIME TO TIME WITHOUT NOTICE IN THE COMPANYŐS SOLE DISCRETION, AND
AWARDEEŐS RIGHTS WILL BE GOVERNED BY THE POLICIES IN EFFECT AT THE TIME OF ANY
EMPLOYMENT STATUS CHANGE. E-MAIL
"BENEFITS" FOR A COPY OF THE MOST CURRENT POLICIES.
4. Termination. Unless terminated earlier under Section
5, 6 or 7 below, an AwardeeŐs rights under this Award Agreement with respect to
the SAs under this Award Agreement shall terminate at the time the SAs are
converted into Common Shares and distributed to Awardee.
5. Termination of Awardee's
Status as a Participant. Except
as otherwise specified in Section 6, 7 and 8 below, in the event of termination
of Awardee's Continuous Status as a Participant (as that term is defined in
Section 2(j) of the Plan), AwardeeŐs rights under this Award Agreement in any
unvested SAs shall terminate. For
the avoidance of doubt, an AwardeeŐs Continuous Status as a Participant
terminates at the time AwardeeŐs actual employer ceases to be the Company or a
ŇSubsidiaryÓ of the Company, as that term is defined in Section 2(y) of the
Plan, and except as otherwise specified in Section 6, 7 and 8 below, no person
shall have any rights as an Awardee under this Award Agreement unless he or she
is in Continuous Status as a Participant on the Award Date.
6. Disability of Awardee. Notwithstanding the provisions of
Section 5 above, in the event of termination of Awardee's Continuous Status as
a Participant as a result of total and permanent disability (as that term is
defined in Section 12(c) of the Plan), outstanding unvested Earned SAs shall
become immediately vested.
7. Death of Awardee. Notwithstanding the provisions of
Section 5 above, if Awardee is, at the time of death, in Continuous Status as a
Participant, outstanding unvested Earned SAs shall become immediately vested.
8. Retirement of Awardee;
Severance.
(a) Notwithstanding the
provisions of Section 5 above, in the event of Awardee's Retirement, Awardee
shall be treated as continuously employed through the vesting dates in Section
3(a) above. For this purpose,
"Retirement" means termination of employment with the Company or a
Subsidiary after the earlier of (a) age 65, or (b) attaining age 55 and 15
years of Continuous Service, provided that immediately prior to termination of
employment Awardee is employed by Microsoft (or a Subsidiary) in the United
States.
This Section 8 will only apply
to a Retirement if (a) the Retirement occurs more than one year after the Award
Date, (b) Awardee executes a release in conjunction with the Retirement in the
form provided by the Company, and (c) AwardeeŐs employment does not terminate
due to misconduct (as determined in the sole discretion of the CompanyŐs senior
corporate officer in charge of the Human Resources department), including but
not limited to misconduct in violation of Company policy and misconduct that
adversely affects the CompanyŐs interests or reputation.
For purposes of this Section 8,
ŇContinuous ServiceÓ means that Awardee has continuously remained an employee
of the Company or a Subsidiary, measured from AwardeeŐs Ňmost recent hire dateÓ
as reflected in the Company records.
For an Awardee who became an employee of the Company following the
acquisition of his or her employer by the Company or a Subsidiary, service with
the acquired employer shall count toward Continuous Service, and Continuous
Service shall be measured from AwardeeŐs acquired company hire date as
reflected in the CompanyŐs records.
If the Awardee dies after an
eligible Retirement under this Section 8, then any shares that would, but for
the AwardeeŐs death, be distributed pursuant to this Section 8 on vesting dates
that follow the AwardeeŐs death shall be immediately vested and distributed in
accordance with this Award Agreement.
(b)
Awardee may vest in shares following AwardeeŐs termination of employment to the
extent provided in a Company severance benefit plan, including the Senior
Executive Severance Benefit Plan. In no event, however, shall any accelerated
or continued vesting under a Company severance benefit plan change the time of
payment specified under this Award Agreement.
9. Value of Unvested SAs. In consideration of the award of these
SAs, Awardee agrees that upon and following termination of Awardee's Continuous
Status as a Participant for any reason (whether or not in breach of applicable
laws), and regardless of whether Awardee is terminated with or without cause,
notice, or pre-termination procedure or whether Awardee asserts or prevails on
a claim that AwardeeŐs employment was terminable only for cause or only with
notice or pre-termination procedure, any unvested SAs under this Award
Agreement shall be deemed to have a value of zero dollars ($0.00).
10.
Conversion of SAs to Common Shares; Responsibility for Taxes.
(a) Provided Awardee has
satisfied the requirements of Section 10(b) below, on the vesting of any Earned
SAs, the vested Earned SAs shall be converted into an equivalent number of
Common Shares that will be distributed to Awardee (or AwardeeŐs legal
representative, if applicable) within 90 days after the date of the vesting
event (but in no event prior to the Determination Date). Notwithstanding the
foregoing, if accelerated vesting of an SA occurs pursuant to a provision of
the Plan not addressed in this Award Agreement, distribution of the related
Common Share shall not occur until the date distribution would have occurred
under this Award Agreement absent this accelerated vesting. The distribution to Awardee (AwardeeŐs
legal representative, if applicable) of Common Shares in respect of the vested
Earned SAs shall be evidenced by means that the Company determines to be appropriate. In the event ownership or issuance of
Common Shares is not feasible due to applicable exchange controls, securities
regulations, tax laws or other provisions of applicable law, as determined by
the Company in its sole discretion, Awardee (AwardeeŐs legal representative, if
applicable) shall receive cash proceeds in an amount equal to the value of the
Common Shares otherwise distributable to Awardee, as determined by the Company
in its sole discretion, net of amounts withheld in satisfaction of the
requirements of Section 10(b) below.
(b) Regardless of any action the Company or AwardeeŐs actual employer takes
with respect to any or all income tax (including federal, state and local
taxes), social insurance, payroll tax, payment on account, or other tax-related
withholding items (ŇTax-Related ItemsÓ) that arise in connection with the SAs,
Awardee acknowledges and agrees that the ultimate liability for any Tax-Related
Items determined by the Company in its discretion to be legally due by Awardee,
is and remains AwardeeŐs responsibility.
Awardee acknowledges and agrees that the Company and/or AwardeeŐs actual
employer (i) make no representations or undertakings regarding the treatment of
any Tax-Related Items in connection with any aspect of the SAs, including the
grant of the SAs, the vesting of Earned SAs, the conversion of Earned SAs into
Common Shares or the receipt of an equivalent cash payment, the subsequent sale
of any Common Shares acquired and the receipt of any dividends; and (ii) do not
commit to and are under no obligation to structure the terms of the grant or
any aspect of the SAs to reduce or eliminate AwardeeŐs liability for any
Tax-Related Items.
Prior to the relevant taxable or tax-withholding event, as applicable, Awardee
shall pay, or make adequate arrangements satisfactory to the Company or to
AwardeeŐs actual employer (in their sole discretion) to satisfy all obligations
for Tax-Related Items. In this
regard, Awardee authorizes the Company or AwardeeŐs actual employer to withhold
all applicable Tax-Related Items from AwardeeŐs wages or other cash
compensation payable to Awardee by the Company or AwardeeŐs actual
employer. Alternatively, or in
addition, the Company or AwardeeŐs actual employer may, in their sole
discretion, and without notice to or authorization by Awardee, (i) sell or
arrange for the sale of Common Shares to be issued upon the vesting of Earned
SAs or other event to satisfy the withholding obligation, and/or (ii) withhold
in Common Shares, provided that the Company and AwardeeŐs actual employer shall
withhold only the amount of shares necessary to satisfy the minimum withholding
amount or such other amount determined by the Company as not resulting in
negative accounting consequences for the Company. Awardee will be deemed to have been
issued the full number of Common Shares subject to the Earned SAs,
notwithstanding that a number of whole vested Common Shares are held back
solely for the purpose of paying the Tax-Related Items. Awardee shall pay to the Company or to
AwardeeŐs actual employer any amount of Tax-Related Items that the Company or
AwardeeŐs actual employer may be required to withhold as a result of AwardeeŐs
receipt of SAs, the vesting of Earned SAs, or the conversion of vested Earned
SAs to Common Shares that cannot be satisfied by the means described in this
paragraph. Except where applicable
legal or regulatory provisions prohibit and notwithstanding anything in the
Plan to the contrary, the standard process for the payment of an AwardeeŐs
Tax-Related Items shall be for the Company or AwardeeŐs actual employer to
withhold in Common Shares only to the amount of shares necessary to satisfy the
minimum withholding amount or such other amount determined by the Company as
not resulting in negative accounting consequences for the Company. The Company may refuse to deliver Common
Shares to Awardee if Awardee fails to comply with AwardeeŐs obligation in
connection with the Tax-Related Items as described in this section 10.
(c) In lieu of issuing fractional Common Shares, on the vesting of a fraction of
an Earned SA, the Company shall round the shares down to the nearest whole
share and any such share that represents a fraction of a SA will be included in
a subsequent vest date.
(d) Until the distribution to Awardee of the Common Shares in respect of the
vested Earned SAs is evidenced by deposit in AwardeeŐs brokerage account,
Awardee shall have no right to vote or receive dividends or any other rights as
a shareholder with respect to such Common Shares, notwithstanding the vesting
of Earned SAs. No adjustment will
be made for a dividend or other right for which the record date is prior to the
date Awardee is recorded as the owner of the Common Shares, except as provided
in Section 14 of the Plan.
(e) By accepting the Award of SAs evidenced by this Award Agreement, Awardee
agrees not to sell any of the Common Shares received on account of vested
Earned SAs at a time when applicable laws or Company policies prohibit a
sale. This restriction shall apply
so long as Awardee is an Employee, Consultant or outside director of the
Company or a Subsidiary of the Company.
11. Non-Transferability of
SAs. AwardeeŐs right in the SAs
awarded under this Award Agreement and any interest therein may not be sold,
pledged, assigned, hypothecated, transferred, or disposed of in any manner,
other than by will or by the laws of descent or distribution. SAs shall not be subject to execution,
attachment or other process.
12. Acknowledgment of Nature
of Plan and SAs. In accepting
the Award, Awardee acknowledges that:
(a) the Plan is established voluntarily by the Company, it is discretionary in
nature and may be modified, amended, suspended or terminated by the Company at
any time, as provided in the Plan;
(b) the Award of SAs is voluntary and occasional and does not create any
contractual or other right to receive future awards of SAs or other awards, or
benefits in lieu of SAs even if SAs have been awarded repeatedly in the past;
(c) all decisions with respect to SAs or other future awards, if any, will be
at the sole discretion of the Company;
(d) AwardeeŐs participation in the Plan is voluntary;
(e) the future value of the underlying Common Shares is unknown and cannot be
predicted with certainty;
(f) if Awardee receives Common Shares, the value of the Common Shares acquired
on vesting of Earned SAs may increase or decrease in value;
(g) notwithstanding any terms or conditions of the Plan to the contrary and
consistent with Section 5 above, in the event of termination of Awardee's
Continuous Status as a Participant under circumstances where Section 8 above
does not apply (whether or not in breach of applicable laws), Awardee's right
to receive SAs and vest under the Plan, if any, will terminate effective as of
the date that Awardee is no longer actively employed and will not be extended
by any notice period mandated under applicable law. Awardee's right to receive Common Shares
pursuant to any Earned SAs after termination of Continuous Status as a
Participant, if any, will be calculated as of the date of termination of
Awardee's active employment and will not be extended by any notice period
mandated under applicable law. The
senior corporate officer in charge of the Human Resources department shall have
the exclusive discretion to determine when Awardee is no longer actively
employed for purposes of the award of SAs; and
(h) Awardee acknowledges and agrees that, regardless of whether Awardee is
terminated with or without cause, notice or pre-termination procedure or
whether Awardee asserts or prevails on a claim that AwardeeŐs employment was
terminable only for cause or only with notice or pre-termination procedure,
Awardee has no right to, and will not bring any legal claim or action for, (a)
any damages for any portion of any Earned SAs that have been vested and converted
into Common Shares, or (b) termination of any unvested SAs under this Award
Agreement.
13. No Employment Right.
Awardee acknowledges that neither the fact of this Award of SAs nor any
provision of this Award Agreement or the Plan or the policies adopted pursuant
to the Plan shall confer upon Awardee any right with respect to employment or
continuation of current employment with the Company or with AwardeeŐs actual
employer, or to employment that is not terminable at will. Awardee further acknowledges and agrees
that neither the Plan nor this Award of SAs makes Awardee's employment with the
Company or AwardeeŐs actual employer for any minimum or fixed period, and that
this employment is subject to the mutual consent of Awardee and the Company or AwardeeŐs
actual employer, and may be terminated by either Awardee or the Company or
AwardeeŐs actual employer at any time, for any reason or no reason, with or
without cause or notice or any kind of pre- or post-termination warning,
discipline or procedure.
14. Administration. Except
as otherwise expressly provided in the Plan, the authority to manage and
control the operation and administration of this Award Agreement shall be
vested in the Committee, and the Committee shall have all powers and discretion
with respect to this Award Agreement as it has with respect to the Plan. Any interpretation of the Award
Agreement by the Committee and any decision made by the Committee with respect
to the Award Agreement shall be final and binding on all parties. References to the Committee in this
Award Agreement shall be read to include a reference to any delegate of the
Committee acting within the scope of his or her delegation.
15. Plan Governs. Except as provided in Schedule A, this
Award Agreement shall be subject to the terms of the Plan and the EOIP, and
this Award Agreement is subject to all interpretations, amendments, rules and
regulations promulgated by the Committee from time to time pursuant to the Plan
and the EOIP.
16. Notices. Any written notices provided for in this
Award Agreement that are sent by mail shall be deemed received three business
days after mailing, but not later than the date of actual receipt. Notices shall be directed, if to
Awardee, at AwardeeŐs address indicated by the CompanyŐs records and, if to the
Company, at the CompanyŐs principal executive office.
17. Electronic Delivery. The Company may, in its sole discretion,
decide to deliver any documents related to SAs awarded under the Plan or future
SAs that may be awarded under the Plan by electronic means or request AwardeeŐs
consent to participate in the Plan by electronic means. Awardee hereby consents to receive such
documents by electronic delivery and agrees to participate in the Plan through
an on-line or electronic system established and maintained by the Company or
another third party designated by the Company.
18. Acknowledgment. By Awardee's acceptance of this Award
Agreement in the manner prescribed by the Company, Awardee acknowledges that
Awardee has received and has read, understood and accepted all the terms,
conditions and restrictions of this Award Agreement, the Plan, and the current
policies referenced in Sections 3(b) and 3(c) above. Awardee understands and agrees that this
Award Agreement is subject to all the terms, conditions, and restrictions
stated in this Award Agreement and in the other documents referenced in the
preceding sentence, as the latter may be amended from time to time in the
CompanyŐs sole discretion.
19. Board Approval. These SAs have been awarded pursuant to
the Plan and this Award of SAs has been approved by the Compensation Committee
of the Board of Directors or the Board of Directors.
20. Governing Law and Venue. This Award Agreement shall be governed
by the laws of the State of Washington, U.S.A., without regard to Washington
laws that might cause other law to govern under applicable principles of
conflicts of law. The venue for any
litigation related to this Award Agreement will be in King County, Washington.
21. Severability. If one or more of the provisions of this
Award Agreement shall be held invalid, illegal or unenforceable in any respect,
the validity, legality and enforceability of the remaining provisions shall not
in any way be affected or impaired thereby and the invalid, illegal or
unenforceable provisions shall be deemed null and void; however, to the extent
permissible by law, any provisions that could be deemed null and void shall
first be construed, interpreted or revised retroactively to permit this Award
Agreement to be construed so as to foster the intent of this Award Agreement
and the Plan.
22. Complete Award Agreement
and Amendment. This Award
Agreement (including the policies referenced in Sections 3(b) and 3(c)) and the
Plan constitute the entire agreement between Awardee and the Company regarding
SAs. Any prior agreements,
commitments or negotiations concerning these SAs are superseded. This Award Agreement may be amended only
by written agreement of Awardee and the Company, without consent of any other
person, provided that no consent is necessary to an amendment that in the
reasonable judgment of the Committee confers a benefit on Awardee. Awardee agrees not to rely on any oral
information regarding this Award of SAs or any written materials not identified
in this Section 22.
23. Code Section 409A. This Award Agreement shall be
interpreted, operated, and administered in a manner so as not to subject
Awardee to the assessment of additional taxes or interest under Code section
409A, and this Award Agreement shall be amended as the Company, in its sole
discretion, determines is necessary and appropriate to avoid the application of
any such taxes or interest.
24. Code Section 162(m). The Award is intended to satisfy the
applicable requirements for the performance-based compensation exception under
Code section 162(m) and applicable IRS guidance issued thereunder, and it is
intended that the Award be interpreted, operated and administered to meet such
requirements.
MICROSOFT CORPORATION
Kathleen Hogan,
Executive Vice President, Human Resources
Exhibit 10.25
Executive
Officer Incentive Plan
PERFORMANCE STOCK AWARD AGREEMENT UNDER
THE MICROSOFT CORPORATION 2001 STOCK PLAN
Award Number
______________
This Award
Agreement sets forth the terms and conditions of an award (the ŇAwardÓ) of
performance stock awards (ŇPSAsÓ) awarded to <<FullName>> (ŇAwardeeÓ) by Microsoft Corporation (the
ŇCompanyÓ) in the exercise of its sole discretion under the Microsoft Corporation
2001 Stock Plan (the ŇPlanÓ) and pursuant to the Microsoft Corporation
Executive Officer Incentive Plan (the ŇEOIPÓ) on <<GrantDate>> (the ŇAward DateÓ). Capitalized terms used but not defined
in this Award Agreement shall have the meanings assigned to them in the Plan.
1. Award.
(a) The
Award is earned over a performance period beginning _____________ and ending
June 30, _________ (the ŇPerformance PeriodÓ). Under the Award, the number of shares
that may be earned at target performance for the Performance Period is <<TargetShares>>
(ŇTarget AwardÓ), and the maximum number of shares that may be earned for the
Performance Period is <<MaxShares>>. At the end of the Performance Period,
the Committee (as that term is defined in Section 2(f) of the Plan) will
determine the number of PSAs earned under the Award as set forth in Section 2
(these earned PSAs are the ŇEarned PSAsÓ).
(b) The PSAs
represent the CompanyŐs unfunded and unsecured promise to issue Common Shares
at a future date, subject to the terms of this Award Agreement and the Plan.
Awardee has no rights under the PSAs other than the rights of a general
unsecured creditor of the Company.
2. Performance
Goal; Earned PSAs.
(a) The
performance goal for the Performance Period is that the Company have positive
operating income for the Performance Period, as reported in the CompanyŐs
financial statements (the ŇPerformance GoalÓ).
(b) Within
90 days following the close of the Performance Period, the Committee shall
assess performance against the Performance Goal in accordance with Section 4.2
of the EOIP. If the Performance Goal for the Performance Period is achieved,
the Committee also shall determine the number of Earned PSAs pursuant to
Appendix A; provided that in no event may the number of Earned PSAs exceed the
maximum amount specified in Section 1(a) or in Section 4.1 of the EOIP. If the Performance Goal for the
Performance Period is not achieved, the number of Earned PSAs shall be zero. The date the Committee makes the
determination of the number of Earned PSAs is the ŇDetermination DateÓ for the
Performance Period.
3. Vesting
of PSAs.
(a) Earned
PSAs shall vest on the first NASDAQ Stock Market regular trading day that is on
or after the Determination Date, subject to the terms of this Award Agreement
and the Plan and provided that Awardee remains continuously employed through
the last day of the Performance Period.
(b) Awardee
agrees that the PSAs subject to this Award Agreement, and other incentive or
performance-based compensation Awardee receives or has received from the
Company, shall be subject to the CompanyŐs executive compensation recovery
policy, as amended from time to time.
4. Termination.
Unless terminated earlier under Section 5, 6 or 7 below, an AwardeeŐs rights
under this Award Agreement with respect to the PSAs under this Award Agreement
shall terminate at the time the PSAs are converted into Common Shares and
distributed to Awardee.
5. Termination
of Awardee's Status as a Participant. Except as otherwise specified in
Section 6 or 7 below, in the event of termination of Awardee's Continuous
Status as a Participant (as that term is defined in Section 2(j) of the Plan),
AwardeeŐs rights under this Award Agreement in any unvested PSAs shall
terminate. For the avoidance of doubt, an AwardeeŐs Continuous Status as a
Participant terminates at the time AwardeeŐs actual employer ceases to be the
Company or a ŇSubsidiaryÓ of the Company, as that term is defined in Section
2(y) of the Plan, and except as otherwise specified in Section 6 or 7 below, no
person shall have any rights as an Awardee under this Award Agreement unless he
or she is in Continuous Status as a Participant on the Award Date.
6. Disability
or Death of Awardee.
(a)
Notwithstanding the provisions of Section 5 above, in the event of termination
of Awardee's Continuous Status as a Participant as a result of total and
permanent disability (as that term is defined in Section 12(c) of the Plan)
before the end of the Performance Period, the Awardee shall become immediately
vested in the Target Award.
(b)
Notwithstanding the provisions of Section 5 above, if at the time of AwardeeŐs
death before the end of the Performance Period he or she is in Continuous
Status as a Participant (including pursuant to Section 7(a) below), the Awardee
shall become immediately vested in the Target Award. If Awardee vests in the
Target Award pursuant to Section 6(b), then no vesting shall occur pursuant to
the Retirement vesting provisions of Section 7(a).
7. Retirement of Awardee; Severance.
(a) Notwithstanding the provisions
of Section 5 above, in the event of Awardee's Retirement, Awardee shall be
treated as continuously employed through the vesting date in Section 3(a)
above; provided that any Earned PSAs shall be prorated, so that the number of
PSAs that vest shall be calculated by multiplying the number of Earned PSAs by (i) the
number of calendar months in which Awardee was in Continuous Service (including
partial months) from the beginning of the Performance Period and the date of
AwardeeŐs Retirement, divided by (ii) the number of calendar months (including
partial months) in the Performance Period.
For this
purpose, "Retirement" means termination of employment with the
Company or a Subsidiary after the earlier of (a) age 65, or (b) attaining age
55 and 15 years of Continuous Service, provided that immediately prior to
termination of employment Awardee is employed by Microsoft (or a Subsidiary) in
the United States.
This Section 7 will only apply
to a Retirement if (i) the Retirement occurs more than one year after the
beginning of the Performance Period, (ii) Awardee executes a release in
conjunction with the Retirement in the form provided by the Company, and (iii)
AwardeeŐs employment does not terminate due to misconduct (as determined in the
sole discretion of the CompanyŐs senior corporate officer in charge of the
Human Resources department), including but not limited to misconduct in
violation of Company policy and misconduct that adversely affects the CompanyŐs
interests or reputation.
For purposes of this Section 7,
ŇContinuous ServiceÓ means that Awardee has continuously remained an employee
of the Company or a Subsidiary, measured from AwardeeŐs Ňmost recent hire dateÓ
as reflected in the Company records.
For an Awardee who became an employee of the Company following the
acquisition of his or her employer by the Company or a Subsidiary, service with
the acquired employer shall count toward Continuous Service, and Continuous
Service shall be measured from AwardeeŐs acquired company hire date as
reflected in the CompanyŐs records.
If the Awardee dies after an
eligible Retirement under this Section 7, then any Common Shares that would,
but for the AwardeeŐs death, be distributed pursuant to this Section 7 on the
vesting date that follows the AwardeeŐs death shall be vested and distributed
after such vesting date in accordance with this Award Agreement.
(b) Awardee
may vest in PSAs following AwardeeŐs termination of employment to the extent provided in a Company severance benefit plan, including
the Senior Executive Severance Benefit Plan. In no event, however, shall any
accelerated or continued vesting under a Company severance benefit plan change
the time of payment specified under this Award Agreement.
8.
Value of Unvested PSAs. In consideration of the award of these PSAs,
Awardee agrees that upon and following termination of Awardee's Continuous
Status as a Participant for any reason (whether or not in breach of applicable
laws), and regardless of whether Awardee is terminated with or without cause,
notice, or pre-termination procedure or whether Awardee asserts or prevails on
a claim that AwardeeŐs employment was terminable only for cause or only with
notice or pre-termination procedure, any unvested PSAs under this Award
Agreement shall be deemed to have a value of zero dollars ($0.00).
9. Conversion
of PSAs to Common Shares; Responsibility for Taxes.
(a) Provided
Awardee has satisfied the requirements of Section 9(b) below, on the vesting of
any Earned PSAs, the vested Earned PSAs shall be converted into an equivalent
number of Common Shares that will be distributed to Awardee (or AwardeeŐs legal
representative, if applicable) within 60 days after the date of the vesting
event (but in no event prior to the Determination Date, except in the event of
accelerated vesting under Section 6 above). Notwithstanding the foregoing, if
accelerated vesting of a PSA occurs pursuant to a provision of the Plan not
addressed in this Award Agreement, to the extent required by Code section 409A,
distribution of the related Common Share shall not occur until the date
distribution would have occurred under this Award Agreement absent this
accelerated vesting. The distribution to Awardee (or AwardeeŐs legal
representative, if applicable) of Common Shares in respect of the vested Earned
PSAs shall be evidenced by means that the Company determines to be appropriate.
In the event ownership or issuance of Common Shares is not feasible due to
applicable exchange controls, securities regulations, tax laws or other provisions
of applicable law, as determined by the Company in its sole discretion, Awardee
(or AwardeeŐs legal representative, if applicable) shall receive cash proceeds
in an amount equal to the value of the Common Shares otherwise distributable to
Awardee, as determined by the Company in its sole discretion, net of amounts
withheld in satisfaction of the requirements of Section 9(b) below.
(b)
Regardless of any action the Company or AwardeeŐs actual employer takes with
respect to any or all income tax (including federal, state and local taxes),
social insurance, payroll tax, payment on account, or other tax-related
withholding items (ŇTax-Related ItemsÓ) that arise in connection with the PSAs,
Awardee acknowledges and agrees that the ultimate liability for any Tax-Related
Items determined by the Company in its discretion to be legally due by Awardee,
is and remains AwardeeŐs responsibility. Awardee acknowledges and agrees that
the Company and/or AwardeeŐs actual employer (i) make no representations or
undertakings regarding the treatment of any Tax-Related Items in connection
with any aspect of the PSAs, including the grant of the PSAs, the vesting of
Earned PSAs, the conversion of Earned PSAs into Common Shares or the receipt of
an equivalent cash payment, the subsequent sale of any Common Shares acquired
and the receipt of any dividends; and (ii) do not commit to and are under no
obligation to structure the terms of the grant or any aspect of the PSAs to
reduce or eliminate AwardeeŐs liability for any Tax-Related Items.
Prior to the
relevant taxable or tax-withholding event, as applicable, Awardee shall pay, or
make adequate arrangements satisfactory to the Company or to AwardeeŐs actual
employer (in their sole discretion) to satisfy all obligations for Tax-Related
Items. In this regard, Awardee authorizes the Company or AwardeeŐs actual
employer to withhold all applicable Tax-Related Items from AwardeeŐs wages or
other cash compensation payable to Awardee by the Company or AwardeeŐs actual
employer. Alternatively, or in addition, the Company or AwardeeŐs actual
employer may, in their sole discretion, and without notice to or authorization
by Awardee, (i) sell or arrange for the sale of Common Shares to be issued upon
the vesting of Earned PSAs or other event to satisfy the withholding
obligation, and/or (ii) withhold in Common Shares, provided that the Company
and AwardeeŐs actual employer shall withhold only the amount of shares
necessary to satisfy the minimum withholding amount or such other amount
determined by the Company as not resulting in negative accounting consequences
for the Company. Awardee will be deemed to have been issued the full number of
Common Shares subject to the Earned PSAs, notwithstanding that a number of
whole vested Common Shares are held back solely for the purpose of paying the
Tax-Related Items. Awardee shall pay to the Company or to AwardeeŐs actual
employer any amount of Tax-Related Items that the Company or AwardeeŐs actual
employer may be required to withhold as a result of AwardeeŐs receipt of PSAs,
the vesting of Earned PSAs, or the conversion of vested Earned PSAs to Common
Shares that cannot be satisfied by the means described in this paragraph.
Except where applicable legal or regulatory provisions prohibit and
notwithstanding anything in the Plan to the contrary, the standard process for
the payment of an AwardeeŐs Tax-Related Items shall be for the Company or
AwardeeŐs actual employer to withhold in Common Shares only to the amount of
shares necessary to satisfy the minimum withholding amount or such other amount
determined by the Company as not resulting in negative accounting consequences
for the Company. The Company may refuse to deliver Common Shares to Awardee if
Awardee fails to comply with AwardeeŐs obligation in connection with the
Tax-Related Items as described in this Section 9.
(c) In lieu
of issuing fractional Common Shares, on the vesting of a fraction of an Earned
PSA, the Company shall round the shares down to the nearest whole share.
(d) Until
the distribution to Awardee of the Common Shares in respect of the vested
Earned PSAs is evidenced by deposit in AwardeeŐs brokerage account, Awardee
shall have no right to vote or receive dividends or any other rights as a
shareholder with respect to such Common Shares, notwithstanding the vesting of
Earned PSAs. No adjustment will be made for a dividend or other right for which
the record date is prior to the date Awardee is recorded as the owner of the
Common Shares, except as provided in Section 14 of the Plan.
(e) By accepting
the Award of PSAs evidenced by this Award Agreement, Awardee agrees not to sell
any of the Common Shares received on account of vested Earned PSAs at a time
when applicable laws or Company policies prohibit a sale. This restriction
shall apply so long as Awardee is an Employee, Consultant or outside director
of the Company or a Subsidiary of the Company.
10. Non-Transferability
of PSAs. AwardeeŐs right in the PSAs awarded under this Award Agreement and
any interest therein may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner, other than by will or by the laws of
descent or distribution. PSAs shall not be subject to execution, attachment or
other process.
11. Acknowledgment
of Nature of Plan and PSAs. In accepting the Award, Awardee acknowledges
that:
(a) the Plan
is established voluntarily by the Company, it is discretionary in nature and
may be modified, amended, suspended or terminated by the Company at any time,
as provided in the Plan;
(b) the
Award of PSAs is voluntary and occasional and does not create any contractual
or other right to receive future awards of PSAs or other awards, or benefits in
lieu of PSAs even if PSAs have been awarded repeatedly in the past;
(c) all
decisions with respect to PSAs or other future awards, if any, will be at the
sole discretion of the Company;
(d)
AwardeeŐs participation in the Plan is voluntary;
(e) the
future value of the underlying Common Shares is unknown and cannot be predicted
with certainty;
(f) if
Awardee receives Common Shares, the value of the Common Shares acquired on
vesting of Earned PSAs may increase or decrease in value;
(g)
notwithstanding any terms or conditions of the Plan to the contrary and
consistent with Section 5 above, in the event of termination of Awardee's
Continuous Status as a Participant under circumstances where Section 7 above
does not apply (whether or not in breach of applicable laws), Awardee's right
to receive PSAs, if any, will terminate effective as of the date that Awardee
is no longer actively employed and will not be extended by any notice period
mandated under applicable law. Awardee's right to receive Common Shares
pursuant to any Earned PSAs after termination of Continuous Status as a
Participant, if any, will be calculated as of the date of termination of
Awardee's active employment and will not be extended by any notice period
mandated under applicable law; or if later, the Determination Date in the event
of continued vesting under Section 7 above. The senior corporate officer in charge
of the CompanyŐs Human Resources department has the exclusive discretion to
determine when Awardee is no longer actively employed for purposes of the award
of PSAs; and
(h) Awardee
acknowledges and agrees that, regardless of whether Awardee is terminated with
or without cause, notice or pre-termination procedure or whether Awardee
asserts or prevails on a claim that AwardeeŐs employment was terminable only
for cause or only with notice or pre-termination procedure, Awardee has no
right to, and will not bring any legal claim or action for, (a) any damages for
any portion of any Earned PSAs that have been vested and converted into Common
Shares, or (b) termination of any unvested PSAs under this Award Agreement.
12. No
Employment Right. Awardee acknowledges that neither the fact of this Award
of PSAs nor any provision of this Award Agreement or the Plan or the policies
adopted pursuant to the Plan shall confer upon Awardee any right with respect
to employment or continuation of current employment with the Company or with
AwardeeŐs actual employer, or to employment that is not terminable at will.
Awardee further acknowledges and agrees that neither the Plan nor this Award of
PSAs makes Awardee's employment with the Company or AwardeeŐs actual employer for
any minimum or fixed period, and that this employment is subject to the mutual
consent of Awardee and the Company or AwardeeŐs actual employer, and may be
terminated by either Awardee or the Company or AwardeeŐs actual employer at any
time, for any reason or no reason, with or without cause or notice or any kind
of pre- or post-termination warning, discipline or procedure.
13. Administration.
Except as otherwise expressly provided in the Plan, the authority to manage and
control the operation and administration of this Award Agreement shall be
vested in the Committee, and the Committee shall have all powers and discretion
with respect to this Award Agreement as it has with respect to the Plan. Any
interpretation of the Award Agreement by the Committee and any decision made by
the Committee with respect to the Award Agreement shall be final and binding on
all parties. References to the Committee in this Award Agreement shall be read
to include a reference to any delegate of the Committee acting within the scope
of his or her delegation.
14. Plan
Governs. Except as provided in Schedule A, this Award Agreement shall be
subject to the terms of the Plan and the EOIP, and this Award Agreement is
subject to all interpretations, amendments, rules and regulations promulgated
by the Committee from time to time pursuant to the Plan and the EOIP.
15. Notices.
Any written notices provided for in this Award Agreement that are sent by mail
shall be deemed received three business days after mailing, but not later than
the date of actual receipt. Notices shall be directed, if to Awardee, at
AwardeeŐs address indicated by the CompanyŐs records and, if to the Company, at
the CompanyŐs principal executive office.
16. Electronic
Delivery. The Company may, in its sole discretion, decide to deliver any
documents related to PSAs awarded under the Plan or future PSAs that may be
awarded under the Plan by electronic means or request AwardeeŐs consent to
participate in the Plan by electronic means. Awardee hereby consents to receive
such documents by electronic delivery and agrees to participate in the Plan
through an on-line or electronic system established and maintained by the
Company or another third party designated by the Company.
17. Acknowledgment.
By AwardeeŐs acceptance of this Award Agreement in the manner prescribed by the
Company, Awardee acknowledges that Awardee has received and has read,
understood and accepted all the terms, conditions and restrictions of this
Award Agreement (including the policy referenced in Section 3(b)) and the Plan.
Awardee understands and agrees that this Award Agreement is subject to all the
terms, conditions, and restrictions stated in this Award Agreement and in the
other documents referenced in the preceding sentence, as the latter may be
amended from time to time in the CompanyŐs sole discretion.
18. Board
Approval. These PSAs have been awarded pursuant to the Plan and this Award
of PSAs has been approved by the Committee or the Board of Directors.
19. Governing
Law and Venue. This Award Agreement shall be governed by the laws of the
State of Washington, U.S.A., without regard to Washington laws that might cause
other law to govern under applicable principles of conflicts of law. The venue
for any litigation related to this Award Agreement will be in King County,
Washington.
20. Severability.
If one or more of the provisions of this Award Agreement shall be held invalid,
illegal or unenforceable in any respect, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby and the invalid, illegal or unenforceable provisions shall be
deemed null and void; however, to the extent permissible by law, any provisions
that could be deemed null and void shall first be construed, interpreted or
revised retroactively to permit this Award Agreement to be construed so as to
foster the intent of this Award Agreement and the Plan.
21. Complete
Award Agreement and Amendment. This Award Agreement (including the policy
referenced in Section 3(b)) and the Plan constitute the entire agreement
between Awardee and the Company regarding PSAs. Any prior agreements,
commitments or negotiations concerning these PSAs are superseded. This Award
Agreement may be amended only by written agreement of Awardee and the Company,
without consent of any other person, provided that no consent is necessary to
an amendment that in the reasonable judgment of the Committee confers a benefit
on Awardee. Awardee agrees not to rely on any oral information regarding this
Award of PSAs or any written materials not identified in this Section 21.
22. Code
Section 409A. Payments under this Award Agreement are intended to be exempt
from Code section 409A to the extent they satisfy the Ňshort-term deferral
exceptionÓ under Code section 409A and otherwise to be compliant with Code
section 409A, and this Award Agreement shall be interpreted, operated and
administered accordingly. To the
extent applicable, each payment under this Award Agreement shall be treated as
a separate payment for purposes of Code section 409A.
23. Code
Section 162(m). The Award is intended to satisfy the applicable
requirements for the performance-based compensation exception under Code
section 162(m) and applicable IRS guidance issued thereunder, and it is
intended that the Award be interpreted, operated and administered to meet such
requirements.
MICROSOFT
CORPORATION
Kathleen
Hogan,
Executive
Vice President, Human Resources
Exhibit 12
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
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(In millions, except ratios) |
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Year Ended June 30, |
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2015 |
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2014 |
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2013 |
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2012 |
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2011 |
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Earnings (a) |
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Earnings from continuing operations
before income taxes |
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$ |
18,507 |
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$ |
27,820 |
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$ |
27,052 |
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$ |
22,267 |
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$ |
28,071 |
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Add: Fixed charges |
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867 |
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674 |
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489 |
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435 |
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349 |
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Add: Cash distributions
from equity method investments |
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1 |
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54 |
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71 |
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74 |
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14 |
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Subtract: Income (loss)
from equity method investments |
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(78 |
) |
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(152 |
) |
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(99 |
) |
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27 |
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110 |
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Total Earnings |
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$ |
19,453 |
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$ |
28,700 |
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$ |
27,711 |
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$ |
22,749 |
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$ |
28,324 |
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Fixed Charges (b) |
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Interest expense |
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$ |
756 |
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$ |
577 |
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$ |
394 |
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$ |
345 |
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$ |
264 |
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Capitalized debt related expenses |
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25 |
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20 |
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35 |
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35 |
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31 |
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Interest component of rental expense |
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86 |
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77 |
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60 |
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55 |
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54 |
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Total Fixed Charges |
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$ |
867 |
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$ |
674 |
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$ |
489 |
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$ |
435 |
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$ |
349 |
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Ratio of Earnings to Fixed Charges |
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22 |
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43 |
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57 |
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|
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52 |
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81 |
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(a) Earnings
represent earnings from continuing operations before income taxes and before
income (losses) from equity method investments plus: (1) fixed charges;
and (2) cash distributions from equity method investments.
(b) Fixed
charges include: (1) interest expense; (2) capitalized debt issuance
costs; and (3) the portion of operating rental expense which management
believes is representative of the interest component of rental expense.
Exhibit 21
SUBSIDIARIES OF REGISTRANT
The
following is a list of subsidiaries of the company as of June 30, 2015,
omitting subsidiaries which, considered in the aggregate, would not constitute
a significant subsidiary.
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Name |
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Where Incorporated |
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Microsoft Ireland Research |
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Ireland |
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Microsoft
Capital Group, LLC |
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United States |
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Microsoft Global
Finance |
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Ireland |
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Microsoft
Ireland Operations Limited |
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Ireland |
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Microsoft
Licensing, GP |
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United States |
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Microsoft
Online, Inc. |
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United States |
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Microsoft
Operations Pte Ltd |
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Singapore |
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Microsoft
Operations Puerto Rico, LLC |
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Puerto Rico |
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Microsoft
Regional Sales Corporation |
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United States |
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MOL Corporation |
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United States |
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Skype
Communications S. r.l. |
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Luxembourg |
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Mojang Synergies
AB |
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Sweden |
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We
consent to the incorporation by reference in Registration Statement Nos.
333-109185, 333-118764, 333-91755, 333-52852, 333-132100, 333-161516,
333-75243, and 333-185757 on Form S-8 and Registration Statement Nos.
333-43449, 333-110107, 333-108843, 333-155495, and 333-184717 on Form S-3 of
our reports dated July 31, 2015, relating to the consolidated financial
statements of Microsoft Corporation and subsidiaries (the ŇCompanyÓ), and the
effectiveness of the CompanyŐs internal control over financial reporting,
appearing in this Annual Report on Form 10-K of Microsoft Corporation for the
year ended June 30, 2015.
/s/
DELOITTE & TOUCHE LLP
Seattle,
Washington
July 31, 2015
Exhibit 31.1
CERTIFICATIONS
I, Satya Nadella, certify that:
1.
I have reviewed this annual report on Form 10-K of Microsoft Corporation;
2.
Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4. The registrantŐs other certifying officer and I
are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrantŐs disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrantŐs internal control over
financial reporting that occurred during the registrantŐs most recent fiscal
quarter (the registrantŐs fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially
affect, the registrantŐs internal control over financial reporting; and
5. The registrantŐs other certifying officer and I
have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrantŐs auditors and the audit committee of
registrantŐs Board of Directors (or persons performing the equivalent
functions):
a)
All significant deficiencies and material weaknesses in the design or operation
of internal control over financial reporting which are reasonably likely to
adversely affect the registrantŐs ability to record, process, summarize and
report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees
who have a significant role in the registrantŐs internal control over financial
reporting.
|
|
|
|
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/s/ SATYA NADELLA |
|
Satya Nadella |
|
Chief Executive
Officer |
July 31,
2015
Exhibit 31.2
CERTIFICATIONS
I, Amy E. Hood, certify that:
1.
I have reviewed this annual report on Form 10-K of Microsoft Corporation;
2.
Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant
as of, and for, the periods presented in this report;
4. The registrantŐs other certifying officer and I
are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrantŐs disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrantŐs internal control over
financial reporting that occurred during the registrantŐs most recent fiscal
quarter (the registrantŐs fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially
affect, the registrantŐs internal control over financial reporting; and
5. The registrantŐs other certifying officer and I
have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrantŐs auditors and the audit committee of
registrantŐs Board of Directors (or persons performing the equivalent
functions):
a)
All significant deficiencies and material weaknesses in the design or operation
of internal control over financial reporting which are reasonably likely to
adversely affect the registrantŐs ability to record, process, summarize and
report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees
who have a significant role in the registrantŐs internal control over financial
reporting.
|
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|
|
|
/s/ AMY E. HOOD |
|
Amy E. Hood |
|
Executive Vice President and Chief
Financial Officer |
July 31,
2015
Exhibit 32.1
CERTIFICATIONS PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
In connection with the Annual Report of Microsoft
Corporation, a Washington corporation (the ŇCompanyÓ), on Form 10-K for
the year ended June 30, 2015, as filed with the Securities and Exchange
Commission (the ŇReportÓ), Satya Nadella, Chief Executive Officer of the
Company, does hereby certify, pursuant to ¤ 906 of the Sarbanes-Oxley Act of
2002 (18 U.S.C. ¤ 1350), that to his knowledge:
(1)
The Report fully complies with the requirements of section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
|
|
|
|
|
/s/ SATYA NADELLA |
|
Satya Nadella |
|
Chief Executive
Officer |
July 31,
2015
[A
signed original of this written statement required by Section 906 has been
provided to Microsoft Corporation and will be retained by Microsoft Corporation
and furnished to the Securities and Exchange Commission or its staff upon
request.]
Exhibit 32.2
CERTIFICATIONS PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
In connection with the Annual Report of Microsoft
Corporation, a Washington corporation (the ŇCompanyÓ), on Form 10-K for
the year ended June 30, 2015, as filed with the Securities and Exchange
Commission (the ŇReportÓ), Amy E. Hood, Chief Financial Officer of the Company,
does hereby certify, pursuant to ¤ 906 of the Sarbanes-Oxley Act of 2002 (18
U.S.C. ¤ 1350), that to her knowledge:
(1)
The Report fully complies with the requirements of section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
|
|
|
|
|
/s/ AMY E. HOOD |
|
Amy E. Hood |
|
Executive Vice President and Chief
Financial Officer |
July 31,
2015
[A
signed original of this written statement required by Section 906 has been
provided to Microsoft Corporation and will be retained by Microsoft Corporation
and furnished to the Securities and Exchange Commission or its staff upon
request.]